What Determines Household Expectations? with Anushka Mitra (Job Market Paper)
This paper uses daily data on household expectations to examine what causes households to adjust their expectations about the future of the economy. We analyze several macro variables of policy interest and find that households respond primarily to movements in the unemployment rate. Further, these responses are non-linear and asymmetric, with households displaying higher sensitivity to larger shocks and to negative information indicating a worsening of the economy. We also find heterogeneity across local labor markets: Households in areas with higher local unemployment are more sensitive to changes in national unemployment than those in areas with lower local unemployment. We further examine whether media plays a role in influencing household expectations, and find that news about unemployment rises sharply during a recession, consistent with the response of expectations.
The labor force participation rate in the United States has exhibited a sharp drop after the 2008 recession. Using the Current Population Survey, this paper first disentangles the trends in the participation rate along various demographic groups using shift-share analysis. Next, using time series, cross-section and individual variation, it examines the determinants of an individual's participation decision. Finally, it concludes with a discussion of the plausibility of various theories explaining the decline in participation from a labor supply lens.
Work in Progress
Optimal Unemployment Insurance in the Presence of Informality with Marcel Peruffo and Luca Riva (Draft Coming Soon)
In developing countries, weak enforcement of labor and tax regulations creates an opportunity for employers to collude with employees and manipulate the unemployment insurance system. In particular, workers who are eligible for benefits have an incentive to agree with their employers to transition into informality and share the proceeds from unemployment checks. We study the importance of this mechanism for the design of optimal unemployment insurance policies in a quantitative Diamond-Mortensen-Pissarides model calibrated with Brazilian data.
The Dynamics of Expectations
This paper analyzes how households’ current perceptions about the economy drives their beliefs about future economic developments. We build a structural vector auto regression model to identify the effect of aggregate shocks on beliefs about the present as well future economic conditions. We find that shocks to the unemployment rate and to inflation cause the largest change in beliefs. Further, we find that a shock to household's current perception of the economy affects their beliefs about the future, but a shock to future beliefs does not change current perception. Using these results as motivation, we build a model to study whether policies that take effect immediately and thereby affect current perception about the economy, such as a stimulus package during a pandemic, are more or less effective compared to policies aimed at influencing expectations about the future, such as measure to reopen the economy.