Hutchins Roundup: Minimum wage, credit ratings, and more

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Minimum wage hikes cut job openings for low-wage workers  

Marianna Kudlyak of the San Francisco Fed, Murat Tasci of the Cleveland Fed, and Didem Tüzemen of the Kansas City Fed find that minimum wage increases reduce the number of vacancies in occupations that pay at or around the prevailing minimum rate. Using data on county-level job openings and state-level minimum wage changes over the 2005-2018 period, the authors estimate that a 10% increase in the state minimum wage causes a 2.4% decline in vacancies across minimum wage occupations in the same quarter and a 4.5% decline a year later. The decline in job postings is concentrated in counties with higher poverty rates and in occupations that employ less educated workers. When employers have fewer openings, they may hire more selectively, the authors suggest, and that may lead to less turnover; for that reason, a higher minimum wage can decrease vacancies without producing any significant change in the level of employment. “This interpretation of the labor market can reconcile the negative effects of minimum wage hikes on vacancies that we find and the relatively small or non-existent effects on employment found in the literature,” the authors conclude.  

Firms with poor environmental standards see lower credit ratings and higher yield spreads 

Poor environmental ratings and higher carbon footprints are associated with lower corporate bond credit ratings and higher yield spreads, particularly for firms located in states with stricter environmental regulations, find Lee Seltzer of the New York Fed, Laura Starks of the University of Texas at Austin, and Qifei Zhu of Nanyang Technological University. Using the 2015 Paris Agreement as a shock to investors’ expectations of future environmental regulations, the authors find that firms with poor environmental profiles (constructed using ESG ratings and carbon emissions data) saw their credit ratings fall and yield spreads rise relative to greener companies after the agreement, especially in environmentally stringent states—suggesting that both credit rating analysts and bond investors reacted to potential tightening of environmental regulations in the future. The composition of bondholders also changed following the agreement. Insurance companies, which tend to have longer investment horizons, decreased their holdings of the less green companies while shorter-term mutual funds did not. These findings reinforce the idea that regulatory risk is “a major channel through which climate and other types of environmental risks get embedded in security prices,” the authors say. 

Australia’s experiment with yield curve control had its flaws  

In March 2020, the Reserve Bank of Australia announced a yield curve control policy, promising to buy as many three-year Australian government bonds as needed to achieve their target rate of 0.25% and renewing this promise in October 2020. David Lucca of the New York Fed and Jonathan H. Wright of Johns Hopkins University find that this yield curve control policy had little to no effect on expectations about the policy rate, yields on longer maturity bonds, or yields on similar assets (such as state-issued bonds). In addition, as the economy rebounded and the market began expecting short-term interest rates to rise, the targeted bond became dislocated from other financial market instruments. In other words, the policy was unable to hold down yields on any other security. The authors argue that yield curve control is structurally similar to quantity-based quantitative easing (QE) policies (which pledge to buy a specific quantity of a given asset), and this episode provides evidence that QE as a whole may be limited in its effectiveness once targeted rates are no longer roughly consistent with market expectations for the path of short rates. 

Chart of the Week: Value of US dollar is rising 

Quote of the Week: 

“Crypto-assets pose financial stability risks through three main channels. First, stress in crypto-asset markets could spill over to players in the wider financial system through direct asset holdings or ownership of service providers. One measure of such linkages is the correlation between changes in the prices of crypto-assets and of equities, which has been positive since 2020. Second, a fall in the value of crypto-assets might have an impact on the wealth of investors, with knock-on effects on the financial system. Third, a loss of faith in the value of crypto-assets – for instance because of operational failures, fraud, price manipulation or cybercrime – could lead to a sharp deterioration in investor confidence, which could spill over to broader financial markets,” says European Central Bank Board Member Fabio Panetta. 

“In a stress situation, a sudden surge in redemptions by stable coin holders could lead to instability in various market segments. For example, Tether, one of the most popular stable coins, promises ‘stability’ by investing in low-risk assets, such as commercial paper, and holds a large proportion of the stock of these instruments in circulation. Large-scale sales of these assets in response to a sudden increase in redemptions could generate instability throughout the commercial paper market. This phenomenon could spread to other stable coins and related sectors, eventually finding its way to the banks that hold the stable coins’ liquidity.” 

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