Hutchins Roundup: Wage polarization, financial stability, and more 


What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Geographical disparities in IT investment have increased wage polarization   

Advances in information technology (IT) have displaced workers who do routine tasks in recent decades. Jan Eeckhout of Pompeu Fabra University, Christoph Hedtrich of Uppsala University and Roberto Pinheiro of the Federal Reserve Bank of Cleveland find that half of the rising wage disparity between routine and non-routine jobs has been driven by the fall in the price of IT capital over the 1990-2015 period. Using data on firms’ IT expenditures, and comparing routine and non-routine jobs, the authors find that the employment and compensation of routine jobs have declined disproportionately in cities with high costs of living. The authors suggest that expensive cities tend to have high productivity that attracts more IT investment, which in turn displaces routine jobs and reallocates them to cheaper areas. “Job polarization is a predominantly urban phenomenon that determines both the employment distribution between and within cities and inequality,” the authors conclude.   

Central banks that are part of financial stability committees are better at avoiding financial turmoil  

Using data on financial stability reports from 24 central banks (not including the U.S. Federal Reserve), Juan M. Londono, Stijn Claessens, and Ricardo Correa of the Federal Reserve Board find that central banks that participate in interagency financial stability committees – and thus have more tools to avoid financial instability – are more effective in identifying and limiting the build-up of financial vulnerabilities than other central banks.  After an increase in financial vulnerabilities or deterioration of sentiment in press accounts, they find, central banks that participate in committees tend to transmit a calmer message, suggesting that the ability to use policy tools other than communications strengthens the incentive to avoid crying wolf.   

Procyclicality of labor force participation is driven by job-loss and job-finding rates   

Using Bureau of Labor Statistics data, Bart Hobijn of Arizona State University and Ayşegül Şahin of University of Texas at Austin find that fluctuations in the job-loss and job-finding rates over the business cycle cause the labor force participation rate to be highly cyclical. The participation rate generally falls during downturns, as more layoffs and fewer hires increase the number of unemployed individuals, who are significantly more likely to drop out of the labor force than the employed. The authors estimate that higher job-loss and lower job-finding rates account for 1.5 percentage points of the 1.7-percentage-point decline in labor force participation over the COVID-19 recession. Recessions have a longer-lived effect on the labor participation rate than on the unemployment rate, the authors find, which slows down labor market recovery. “During the upcoming recovery, cyclical factors affecting the labor supply will be more of a drag on employment than those captured by the unemployment rate,” the authors conclude.   

Chart of the week: Pre-tax median household income fell in 2020, but rose after taxes thanks to COVID relief 

Bar chart of the percent change in median household money income and post-tax income from 2018-2019 and 2019-2020

Quote of the week:  

“[M]any businesses now tell us that the supply disruptions are lasting longer than they originally thought and many do not expect them to resolve until the middle of next year or later. Many firms have been able to pass on the increased cost of inputs to their customers in the form of higher prices. At the same time, labor shortages have led firms to raise wages. These developments, along with continued elevated inflation readings, mean that the ‘transitory’ language has become a less useful description of the inflation situation,” says Loretta Mester, President of the Cleveland Fed. 

“My own modal forecast is for inflation to remain high this year and then to begin to move back down next year; however, I see upside risks to this forecast. It is possible that the higher prices could cause longer-run inflation expectations to rise above the levels consistent with our 2% inflation goal, thereby putting upward pressure on inflation. These levels could only be sustained if monetary policy was too accommodative, and the Fed would need to respond to bring inflation and inflation expectations in line with the 2% goal. These dynamics are difficult to communicate in a word or two, especially in an environment where both strong demand and supply factors are in play. But a statement that offered more of an explanation of the FOMC’s views on the factors affecting current inflation readings, the outlook for inflation, and the risks around that outlook would give the public a better sense of the FOMC’s assessment than merely saying that elevated readings largely reflect transitory factors.”  

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