Hutchins Roundup: Monetary policy, McDonald’s, and more


Studies in this week’s Hutchins Roundup find investors see expansionary monetary policy as a signal of poor economic fundamentals, McDonald’s passes the cost of higher minimum wages onto customers, and more.

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When the Fed unexpectedly lowers interest rates, investors take less risk, not more

Investors interpret expansionary monetary policy as a signal that the economy is doing poorly—and flee risky investments in response, find Michael Smolyansky and Gustavo Suarez of the Federal Reserve Board. The usual logic suggests that lower interest rates will encourage riskier investment, both because risky firms generally benefit from economic growth and because low interest rates cause investors to “reach” for riskier assets’ higher returns. After unanticipated Fed announcements of interest rate cuts, however, the authors find the opposite effect: the prices of risky corporate bonds underperform relative to safer ones. Conversely, when interest rates are unexpectedly increased, the relative prices of risky bonds rise. This suggests that investors believe the Fed has superior information about the state of the economy, the authors say. Rather than anticipating expansionary policy’s benefits, investors see lower rates as a response to weak economic fundamentals and invest accordingly.

Rather than cutting jobs, McDonald’s passes the cost of minimum wage increases onto customers

When the minimum wage increases, McDonald’s—one of the largest low-wage employers in the U.S.—neither replaces its employees with labor-saving technology nor closes restaurants. Instead, the increased cost of labor is almost entirely passed through to customers in the form of higher prices, find Orley Ashenfelter of Princeton University and Štěpán Jurajda of CERGE-EI. Using geographic variation in minimum wage hikes from 2016 to 2020, the authors find that for every 1% increase in the minimum wage, hourly wages at McDonald’s increase by 0.7% and the price of a Big Mac increases by 0.14%. They find no association between minimum wage hikes and installation of more labor-saving touch-screen technology or restaurant exit rates. Furthermore, although 40% of restaurants facing minimum wage hikes paid wages close to the mandated minimums, both before and after the increase, nearly as many raised their pay by more than required by the minimum wage increase. These restaurants are maintaining a pay “premium,” the authors say, to attract employees from other entry-level, low-skilled jobs.

Private equity ownership of nursing homes reduces quality of care

Private Equity (PE) investment in healthcare has increased from $5 billion to more than $100 billion over the last two decades. Atul Gupta from Wharton Health Care Management and coauthors find that going to a PE-owned nursing home increases the probability of death during the stay and the first 90 days afterward by about 10%. This implies an additional 20,150 lives have been lost due to the increase in private equity ownership over the 2005-2017 sample period. Going to a PE-owned nursing home is also associated with worse outcomes using other measures of patient quality, such as uptake of antipsychotic medication, patient mobility, and pain intensity. Furthermore, the authors document a decrease in nurse availability and regulatory compliance in PE-owned nursing homes and an increase in management fees, interest payments, and leasing payments following an acquisition. Taken together, this suggests that PE ownership shifts operating costs away from staffing and quality-enhancing measures towards costs that are profit drivers for the firm.

Chart of the week: Labor force participation has changed most for younger women

Change in the Labor Force Participation Rate Since February 2020, by Gender and Age

Bar chart of change in labor force participation since February 2020, by gender and age

Quote of the week:

“We have all been living in a world that for a quarter of a century, where all of the pressures were disinflationary… [W]e have averaged less than 2% inflation for more than the last 25 years.  Inflation dynamics do change over time, but they don’t change on a dime. So we don’t see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics,” says Jerome Powell, Chairman of the Federal Reserve.

“I will also say that forecasters need to be humble and have a great deal to be humble about, frankly. But if it does turn out that unwanted inflation pressures arise, and they are persistent, we have the tools to deal with that and we will.”