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Firms with higher supply chain risk prefer industry leaders and nearby suppliers

Using textual analysis of transcripts of almost 200,000 conference calls by U.S. public companies since 2002, Nuri Ersahin of Michigan State University, Mariassunta Giannetti of the Stockholm School of Economics, and Ruidi Huang of Southern Methodist University quantify firms’ supply chain risk. They find that companies with higher exposure to supply chain risk are more likely to diversify suppliers, often choosing domestic suppliers and industry leaders in order to mitigate risk. Additionally, the authors find that firms with higher supply chain risk are more likely to vertically integrate through mergers and acquisitions. The findings suggest that disruption in supply chains has the potential to cause long-term changes in the organization of economic activity, an especially important concern in the years following the COVID-19 pandemic.

Post-childbirth wage subsidies can help close gender wage gaps

Francesca Barigozzi of the University of Bologna, Helmuth Cremer of the University of Toulouse Capitole, and Emmanuel Thibault of the Toulouse School of Economics find that women who take a temporary absence from the labor market after childbirth experience long-term or permanent wage penalties relative to individuals who do not do so. The authors develop a model of on-the-job human capital accumulation and wage rates, in which the temporary absence slows the growth of on-the-job skills and may induce working mothers to enter a cycle of lower effort and lower wages relative to identical counterparts. The authors argue that temporary subsidies to mothers’ wages, such as Earned Income Tax Credits, incentivize mothers to maintain their labor supply and mitigate the loss of human capital, helping to close the wage gap. This creates a positive spiral of increasing labor supply and wage rates, alleviating the gender gap in earnings both in the short and long run. In contrast, mandatory maternity leave policies and cash transfers induce women to lower their labor supply and reduce the likelihood of closing the wage gap.

Uninsured deposits pose risk management dilemma

Itamar Drechsler of the University of Pennsylvania and Alexi Savov, Philipp Schnabl, and Olivier Wang of New York University investigate the effects of interest rates on bank liquidity risk. They show that depositors are unlikely to run at low interest rates because assets dominate the bank’s valuation so withdrawals have only a small effect on the bank’s net position, eliminating the run incentive. As interest rates rise, the deposit franchise (value a bank derives from paying a below-market rate on deposits) dominates a bank’s valuation, increasing the run incentive as withdrawals have an increasing effect on the bank’s position. Banks can offset this liquidity risk by making their asset holdings less sensitive to changes in interest rates, but this creates a dilemma: the bank is now exposed to downside interest rate risk. In the worst case, falling interest rates cause their deposit franchise to lose value more than their assets gain value, creating a “zombie bank.” The authors show that this dilemma is worse in banks with a high proportion of uninsured demand deposits, like Silicon Valley Bank. Regulators can address this by forcing banks to meet a minimum capital requirement. The authors find that the optimal minimum capital increases with the market interest rate and the share of uninsured depositors.

Chart of the week: Labor force participation rate has mostly recovered to pre-pandemic projected levels

A line graph showing US labor force participation rate, measured quarterly in percentage terms, from 2018 Q1 to 2023 Q1. Actual numbers and a CBO projection from January 2020 are shown. From 2018 Q1 to 2020 Q1, participation rates rose from roughly 62.8% to roughly 63.3%. They then fell sharply during the pandemic and have recovered to roughly 62.5% at their most recent level. CBO projections from January 2020 show the labor force participation rate steadily falling until 2023 Q3 to a level of roughly 62.5%.

Chart courtesy of the Wall Street Journal

Quote of the week:

“You have refused to provide clarity on whether digital assets offered as part of an investment contract are subject to securities laws. And, more importantly, how these firms should comply with those laws. You’re punishing digital asset firms for allegedly not adhering to the law when they don’t know it will apply to them. It’s nonsensical,” House Financial Services Committee Chair Patrick McHenry (R-N.C.) told Gary Gensler, Chairman of the Securities and Exchange Commission.

Gensler’s reply: “I’ve been clear with many members of this industry that right now they need to come into compliance. We have one goal: to bring them into compliance and to stop co-mingling all these functions, stop using customer funds as if they’re their own. It’s like somebody who’s got their hand in the cash register because they say, ‘I want to take some money out of the cash register for the weekend. I’ll put it back later.’ That’s just not proper.”

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