Hutchins Roundup: Unemployment insurance, average inflation targeting, 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. 

Ad hoc Unemployment Insurance extensions have been well targeted  

In most states, unemployment insurance (UI) benefits last for 26 weeks and benefits may be extended for an additional 13 or 20 weeks if the state unemployment rate exceeds a certain threshold. Gabriel Chodorow-Reich from Harvard, Peter Ganong from the University of Chicago, and Jonathan Gruber from MIT highlight two shortcomings of this system: first, states can opt-out so the extended benefits are rarely triggered. Second, an additional 13 or 20 weeks in benefits might not be enough during severe recessions. As a result, Congress has enacted temporary additional extensions during every recession in the last 40 years, with extensions ranging from 6 to 53 weeks. Comparing the performance of actual UI extensions to those that would have occurred under common proposals for automatic triggers, the authors find that the ad hoc extensions have performed well: extended benefits have been available when the labor market was on average weaker than when they would have been available under the automatic trigger policies, holding total cost fixed. The authors caution, however, that “past behavior is no guarantee of future legislative performance and that there may be other benefits to automating policy.” Finally, they show that the cost of more systematic policy would be close to zero compared to ad-hoc extensions.  

Average inflation targeting can boost the Fed’s credibility   

In August 2020, the Federal Reserve announced that instead of targeting a 2% inflation rate, it would aim for an inflation rate that averages 2% over some period. Since the timeframe for the average inflation rate is not formally defined, the new framework provides the Fed flexibility to optimize welfare and improves its credibility, argue Chengcheng Jia of the Federal Reserve Bank of Cleveland and Jing Cynthia Wu of the University of Notre Dame. If the private sector believes that the Fed will target inflation over a given period, there is less of a tradeoff between economic slack and inflation. The Fed, which needs to adjust the horizon for the target depending on the state of the economy, thus has an incentive to be ambiguous about the period it announces to the market. By not committing to a fixed horizon, the Fed deviates less from the market’s expectations, the authors find, which increases the Fed’s credibility in the long run. As such, ambiguous communication about the horizon provides the Fed with “a larger following and better welfare than clear communication with any [horizon]”, the authors conclude.   

Paid Family Leave policies improve employment outcomes for caregivers of older adults  

Breno Braga of the Urban Institute and co-authors examine whether Paid Family Leave (PFL) in California and New Jersey makes caregivers more likely to work while providing care. They find that women with a spouse in poor health were 7.4 percentage points more likely to work after the PFL policy went into effect and women living within 10 miles of a parent in poor health were 5.6 percentage points more likely to work. The results were ambiguous for women living more than 10 miles from a parent in poor health and for men in all of these situations. In addition, women who were affected by the PFL policies were also 8 percentage points less likely to report depression after the implementation of PFL. The authors note that caregiving for older adults is often “intermittent, unpredictable, and complex” which can make work difficult or impossible. Thus, the authors conclude, providing PFL allows workers flexibility to continue their jobs while working and is an important support for caregivers.   

Chart of the week: Low-wage workers saw larger wage gains over 2021 

Source: Atlanta Wage Growth Tracker, Bureau of Labor Statistics 

Quote of the week:  

“We are downgrading the growth for this year to 4.4%, mainly driven by downgrades for the U.S. and China. Growth for 2023 is projected to be 3.8%. For many advanced economies and emerging and developing economies, we are upgrading our inflation forecasts for this year. The global economy remains in the grip of the pandemic. New virus variants could further disrupt the recovery. We’re seeing inflation come up strongly in many countries. If, for instance, that leads to much more tightened monetary policy in the U.S. than is being expected, then that could tighten global financial conditions. In China, if there are more lockdowns because of the zero-COVID strategy then that could lead to more global supply chain disruptions. So these are some of the risks that we are concerned about,” says Gita Gopinath, First Deputy Managing Director of the International Monetary Fund.  

“First and foremost, we need to end the grip of this pandemic. That requires much stronger global cooperation and action to make sure that there is widespread vaccination, testing, and access to therapeutics, including the new antiviral drugs that are on the market, and it should be made available equitably around the world. Secondly, for individual countries, their national policies should be tailored to country-specific circumstances depending upon the pace of their recovery, inflation dynamics, and the amount of fiscal and monetary policy space they have.” 

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