NBER Annual Conference on Macroeconomics: Abstracts for Day Two

First paper:

Declining Desire to Work and Downward Trends in Unemployment and Participation, by Regis Barnichon and Andrew Figura: Abstract The US labor market has witnessed two apparently unrelated trends in the last 30 years: a decline in unemployment between the early 1980s and the early 2000s, and a decline in labor force participation since the early 2000s. We show that a substantial factor behind both trends is a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s. A decline in desire to work lowers both the unemployment rate and the participation rate, because a nonparticipant who wants to work has a high probability to join the unemployment pool in the future, while a nonparticipant who does not want to work has a low probability to ever enter the labor force. We use cross-sectional variation to estimate a model of non-participants' propensity to want a job, and we find that changes in the provision of welfare and social insurance, possibly linked to the mid-90s welfare reforms, explain about 50 percent of the decline in desire to work.

Second paper:

External and Public Debt Crises, by Cristina Arellano, Andrew Atkeson, and Mark Wright: Abstract In recent years, the members of two advanced monetary and economic unions -- the nations of the Eurozone and the states of the United States of America -- experienced debt crises with spreads on government borrowing rising dramatically. Despite the similar behavior of spreads on public debt, these crises were fundamentally different in nature. In Europe, the crisis occurred after a period of significant increases in government indebtedness from levels that were already substantial, whereas in the USA state government borrowing was limited and remained roughly unchanged. Moreover, whereas the most troubled nations of Europe experienced a sudden stop in private capital flows and private sector borrowers also faced large rises in spreads, there is little evidence that private borrowing in US states was differentially affected by the creditworthiness of state governments. In this sense, we can say that the US States experienced a public debt crisis , whereas the nations of Europe experienced an external debt crisis affecting both public and private borrowers. Why did Europe experience an external debt crisis and the US States only a public debt crisis? And, why did the members of other economic unions, such as the provinces of Canada, not experience a debt crisis at all despite high and rising provincial public debt levels? In this paper, we construct a model of default on domestic and external public debt and interference in private external debt contracts and use it to argue that these different debt experiences result from the interplay of differences in the ability of governments to interfere in the private external debt contracts of their citizens, with differences in the flexibility of state fiscal institutions. We also assemble a range of empirical evidence that suggests that the US States are less fiscally flexible but more constrained in their ability to interfere in private contracts than the members of other economic unions, which simultaneously exposes the states to public debt crises while insulating them from an external debt crisis affecting private sector borrowers within the state. In contrast, Eurozone nations are more fiscally flexible but have a greater ability to interfere with the contracts, which together allow for more public borrowing at the cost of a joint public and private external debt crisis. Lastly, Canadian provincial governments are both fiscally flexible and limited in their ability to interfere, which allows both for more public borrowing and limits the likelihood of either a public or external debt crisis occurring. We draw lessons from these findings for the future design of Eurozone economic and legal institutions.