The Redistribution Recession: How Labor Market Distortions Contracted the Economy

Hardcover | November 28, 2012

byCasey B. Mulligan

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Since 2007, many fundamental aspects of the economy and the labor market have changed dramatically. With the exception of Medicaid, subsidies flowing to the unemployed and financially distressed households in the forms of loan forgiveness and government transfers almost tripled. The generosityof mean-tested subsidies like food stamps, and employment-tested subsidies like unemployment insurance have steadily increased. Congress considered legislation that would raise marginal income tax rates, and would present Americans with new health benefits that would be phased out as a function ofincome. Also, a large number of homeowners owed more on their mortgages than their houses were worth, and many in both the private and public sectors renegotiated their mortgage contracts. And many others renegotiated business debts, consumer loans, student loans, and tax debts. Labor economist Casey B. Mulligan argues that because the way these trends have affected the labor market, they deepened, if not caused, the recession. He explains how progressive tax rates and binding minimum-wage laws reduce labor usage, consumption, and investment, and how they increase laborproductivity. This means that while a small part of the population actually works more, overall hours worked in the whole economy are less. He explains and examines the pratical ways that for many people during a recession it costs more to earn more, and how people are working less because of it. One newly discovered aspect of the costs on earning is the large portion of the labor force renegotiating debt. Mulligan quantifies how borrowers can expect their earnings to affect the amount that lenders will forgive in debt renegotiation, and how this has acted as a massive implicit tax onearning. He also measures the changes in market tax rates that resulted directly from "social safety net" programs, and quantifies these changes' effects on the labor market and the economy. Mulligan argues that much of the decline in labor usage since 2007 was a reaction to the combination ofhigher marginal tax rates and a higher federal minimum wage, and that it is important to understand why labor market distortions like these suddenly increased, and to what degree those increases were caused by the various measures enacted to boost the labor market. The Redistribution Recession is a controversial, clear-cut, and thoroughly researched analysis of the effects of various government policies on the labor market during the recent recession.

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Since 2007, many fundamental aspects of the economy and the labor market have changed dramatically. With the exception of Medicaid, subsidies flowing to the unemployed and financially distressed households in the forms of loan forgiveness and government transfers almost tripled. The generosityof mean-tested subsidies like food stamps, ...

Casey B. Mulligan is Professor of Economics at the University of Chicago, author of Parental Priorities and Economic Inequality, and weekly contributor to Economix blog for the New York Times.

other books by Casey B. Mulligan

Format:HardcoverDimensions:320 pages, 9.25 × 6.12 × 0.98 inPublished:November 28, 2012Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199942218

ISBN - 13:9780199942213

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Table of Contents

Preface1. Introduction2. The Rise of Labor ProductivityQuarterly Indicators of Aggregate Economic QuantitiesMovements Along an Aggregate Marginal Productivity ScheduleOn Average, Real Wages did not FallWas It Customer Demand? Factor Reduction and Factor Substitution by IndustryNeither Wealth Effects nor Intertemporal Substitution Effects Explain the "Supply" ShiftLabor Market Distortions since 2007Conclusion: Productivity Patterns Begin to Reveal the Recession's CausesAppendix 2.1: Productivity, Labor, and Residuals in Prior DownturnsAppendix 2.2: Sensitivity Analysis3. The Expanding Social Safety NetA Framework for Quantifying the Generosity of the Safety Net as a WholeLegislation Made the Safety Net Available to Millions MoreLegislation Increased the Amount of Benefits Received per Program ParticipantMost of the Increase in Government Safety Net Expenditure is the Direct Result of Program Rule ChangesSafety Net Rule Changes and Assistance for the UnemployedMeans-tested Loan ForgivenessConclusion: Replacement Rates for Aggregate AnalysisAppendix 3.1: Calculation and Aggregation of Statutory Eligibility and Benefit IndicesAppendix 3.2: Sensitivity AnalysisAppendix 3.3: The Self-Reliance Rate OutlookAppendix 3.4: The Making Work Pay Tax Credit4. Supply and Demand: Labor Market Consequences of Safety Net ExpansionsThe Income-Maximization FallacyLabor and Output Effects of Safety Net ExpansionsPredictions for Consumption and InvestmentCalibrating the Wage Elasticity of Aggregate Labor SupplyConclusions and InterpretationAppendix 4.1: Comparative Advantage with Heterogeneous Effects of the Safety Net ExpansionsAppendix 4.2: Calibrating the Supply Elasticity from Unemployment Duration StudiesAppendix 4.3: Safety Net Distortions Measured in Dollars per Year5. Means-Tested Subsidies and Economic Dynamics since 2007The Neoclassical Growth Model with Targeted Means-Tested SubsidiesData and Simulation ResultsEffects of the Safety Net ExpansionInterpreting the Residual Labor Market DistortionsAn Investment Distortion by Itself does not Fit Actual BehaviorConclusionsAppendix 5.1: Calibration, Simulation, and Additional Sensitivity Analysis6. Cross-Sectional Patterns of Employment and Hours ChangesCross-sectional Patterns of Self-Reliance Rate ChangesWork Hours Changes by Demographic Group and RegionProgram Participation Changes by Demographic GroupConclusion: The Cross-Sectional Patterns of Employment and Hours Changes are as Expected from a Large Safety Net ExpansionAppendix: Summary Statistics and Additional Results7. Keynesian and Other Models of Safety Net StimulusThe Safety Net and Consumer SpendingTransfers and Government Purchases are not the SameLabor Market Slack and the Marginal Effects of SupplySticky Prices, the Wage Elasticity of Labor Demand, and the Zero Lower BoundAn Econometric Model that Nests My Approach with the Slack Market and Sticky Price HypothesesConclusion: Whether Labor Supply Matters More, or Less, during a Recession is an Empirical QuestionAppendix: The Safety Net, Sticky Prices, and Monetary Policy8. Recession-Era Effects of Factor Supply and Demand: Evidence from the Seasonal Cycle, the Construction Market, and Minimum Wage HikesThe Christmas and the Academic Seasons as Demand and Supply ShiftsChristmas Demand in Recessions and BoomsThe Summer Seasonal for Employment and UnemploymentHousing Investment Crowds Out Non-Residential ConstructionThe Employment Effects of Recent Minimum Wage Hikes Were No Less than BeforeThe Federal Minimum Wage Hikes Likely Reduced National Employment by Hundreds of Thousands, Especially Among the Young and UnskilledConclusion: Labor Supply Still Matters, About as Much as It Did in the Past9. Incentives and Compliance under the Federal Mortgage Modification GuidelinesThe Budget Set of a Borrower Facing the FDIC-HAMP Modification GuidelinesBorrower Reactions under Full Information and Full Compliance: Spend More and Work LessLender Incentives to Expand Modification CapacityConclusionsAppendix 9.1: Principal Modifications and the Eligible Income RangeAppendix 9.2: Marginal Tax Rates with Various Horizons and Discount Rates10. Uncertainty, Redistribution, and the Labor MarketA Model of the Equity-Efficiency TradeoffPossible Changes in the Equity-Efficiency Tradeoff, and the Optimal Degree of Social InsuranceThe Cost-Benefit Analysis of Safety Net Expansions: Necessary IngredientsConclusions11. ConclusionsIncentives MatterWas the Financial Collapse a Cause, or Effect?Labor Supply and Demand Help Explain an Unhappy SituationBibliography