The Redistribution Recession: How Labor Market Distortions Contracted the Economy

by Casey B. Mulligan

Overview

Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.

Economist Casey B. Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening-if not causing-the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses according to age, skill, and family composition. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession. The book provides an authoritative, comprehensive economic analysis of the marginal tax rates implicit in public and private sector subsidy programs, and uses quantitative measures of incentives to work and their changes over time since 2007 to illustrate production and employment patterns. It reveals the startling amount of work incentives eroded by the labyrinth of new and existing social safety net program rules, and, using prior results from labor economics and public finance, estimates that the labor market contracted two to three times more than it would have if redistribution policies had remained constant.

In The Redistribution Recession, Casey B. Mulligan offers hard evidence to contradict the notion that work incentives suddenly stop mattering during a recession or when interest rates approach zero, and offers groundbreaking interpretations and precise explanations of the interplay between unemployment and financial markets.

Product Details

ISBN-13:	9780199942213
Publisher:	Oxford University Press
Publication date:	11/02/2012
Edition description:	New Edition
Pages:	364
Product dimensions:	6.30(w) x 9.30(h) x 3.20(d)

About the Author

Professor of Economics, University of Chicago, author of Parental Priorities and Economic Inequality, weekly contributor to Economix blog for the New York Times

Table of Contents

Preface
Chapter 1 Introduction
Chapter 2 The Rise of Labor Productivity
Quarterly Indicators of Aggregate Economic Quantities
Movements Along an Aggregate Marginal Productivity Schedule
On Average, Real Wages did not Fall
Was It Customer Demand? Factor Reduction and Factor Substitution by Industry
Neither Wealth Effects nor Intertemporal Substitution Effects Explain the "Supply" Shift
Labor Market Distortions since 2007
Conclusion: Productivity Patterns Begin to Reveal the Recession's Causes
Appendix 2.1: Productivity, Labor, and Residuals in Prior Downturns
Appendix 2.2: Sensitivity Analysis
Chapter 3 The Expanding Social Safety Net
A Framework for Quantifying the Generosity of the Safety Net as a Whole
Legislation Made the Safety Net Available to Millions More
Legislation Increased the Amount of Benefits Received per Program Participant
Most of the Increase in Government Safety Net Expenditure is the Direct Result of Program Rule Changes
Safety Net Rule Changes and Assistance for the Unemployed
Means-tested Loan Forgiveness
Conclusion: Replacement Rates for Aggregate Analysis
Appendix 3.1: Calculation and Aggregation of Statutory Eligibility and Benefit Indices
Appendix 3.2: Sensitivity Analysis
Appendix 3.3: The Self-Reliance Rate Outlook
Appendix 3.4: The Making Work Pay Tax Credit
Chapter 4 Supply and Demand: Labor Market Consequences of Safety Net Expansions
The Income-Maximization Fallacy
Labor and Output Effects of Safety Net Expansions
Predictions for Consumption and Investment
Calibrating the Wage Elasticity of Aggregate Labor Supply
Conclusions and Interpretation
Appendix 4.1: Comparative Advantage with Heterogeneous Effects of the Safety Net Expansions
Appendix 4.2: Calibrating the Supply Elasticity from Unemployment Duration Studies
Appendix 4.3: Safety Net Distortions Measured in Dollars per Year
Chapter 5 Means-Tested Subsidies and Economic Dynamics since 2007
The Neoclassical Growth Model with Targeted Means-Tested Subsidies
Data and Simulation Results
Effects of the Safety Net Expansion
Interpreting the Residual Labor Market Distortions
An Investment Distortion by Itself does not Fit Actual Behavior
Conclusions
Appendix 5.1: Calibration, Simulation, and Additional Sensitivity Analysis
Chapter 6 Cross-Sectional Patterns of Employment and Hours Changes
Cross-sectional Patterns of Self-Reliance Rate Changes
Work Hours Changes by Demographic Group and Region
Program Participation Changes by Demographic Group
Conclusion: The Cross-Sectional Patterns of Employment and Hours Changes are as Expected from a Large Safety Net Expansion
Appendix: Summary Statistics and Additional Results
Chapter 7 Keynesian and Other Models of Safety Net Stimulus
The Safety Net and Consumer Spending
Transfers and Government Purchases are not the Same
Labor Market Slack and the Marginal Effects of Supply
Sticky Prices, the Wage Elasticity of Labor Demand, and the Zero Lower Bound
An Econometric Model that Nests My Approach with the Slack Market and Sticky Price Hypotheses
Conclusion: Whether Labor Supply Matters More, or Less, during a Recession is an Empirical Question
Appendix: The Safety Net, Sticky Prices, and Monetary Policy
Chapter 8 Recession-Era Effects of Factor Supply and Demand: Evidence from the Seasonal Cycle, the Construction Market, and Minimum Wage Hikes
The Christmas and the Academic Seasons as Demand and Supply Shifts
Christmas Demand in Recessions and Booms
The Summer Seasonal for Employment and Unemployment
Housing Investment Crowds Out Non-Residential Construction
The Employment Effects of Recent Minimum Wage Hikes Were No Less than Before
The Federal Minimum Wage Hikes Likely Reduced National Employment by Hundreds of Thousands, Especially Among the Young and Unskilled
Conclusion: Labor Supply Still Matters, About as Much as It Did in the Past
Chapter 9 Incentives and Compliance under the Federal Mortgage Modification Guidelines
The Budget Set of a Borrower Facing the FDIC-HAMP Modification Guidelines
Borrower Reactions under Full Information and Full Compliance: Spend More and Work Less
Lender Incentives to Expand Modification Capacity
Conclusions
Appendix 9.1: Principal Modifications and the Eligible Income Range
Appendix 9.2: Marginal Tax Rates with Various Horizons and Discount Rates
Chapter 10 Uncertainty, Redistribution, and the Labor Market
A Model of the Equity-Efficiency Tradeoff
Possible Changes in the Equity-Efficiency Tradeoff, and the Optimal Degree of Social Insurance
The Cost-Benefit Analysis of Safety Net Expansions: Necessary Ingredients
Conclusions
Chapter 11 Conclusions
Incentives Matter
Was the Financial Collapse a Cause, or Effect?
Labor Supply and Demand Help Explain an Unhappy Situation
Bibliography

Editorial Reviews

"Much of the policy reaction to the Great Recession emphasized Keynesian effects on aggregate demand and downplayed individual incentives to work, produce, and invest. In contrast, Casey Mulligan's research focuses on how an expanded array of U.S. safety-net programs-food stamps, unemployment insurance, Medicaid, and housing/mortgage assistance programs-raised effective marginal income-tax rates especially for poor families. These diminished incentives to work help to explain the weakness of the U.S. economic recovery since the end of the recession in 2009 and also explain why Barack Obama is justifiably called the 'Food-Stamp President.' Hopefully, future government policymakers will deliver better results by learning from this important book." —Robert J. Barro, Paul M. Warburg Professor of Economics, Harvard University

"Professor Mulligan analyzes the question of why has labor supply remained low and unemployment remained high during the current recession. He finds that the expansion of government safety net programs along with their associated high marginal tax rates, decreases the economic incentives for labor supply. The question at issue is how much of the decrease in labor supply arises from these effects and their associated redistribution of income compared to the decreases in demand in sectors such as construction and manufacturing? He concludes that it is possible that nearly all or at least much of the decline in labor usage can be attributed to expansion of the social safety net. I highly recommend this sure to be controversial analysis of the effects of the Great Recession. Professor Mulligan has provided an innovative analysis of our current economic woes, which should cause most economists to rethink their views of what has gone wrong." —Jerry Hausman, McDonald Professor of Economics, MIT

"Casey Mulligan's The Redistribution Recession presents a heterodox perspective on the Great Recession. The book argues that redistributive and other policies enacted to help cushion the blow of the financial and housing market collapses have reduced incentives to work, and thus had the unintended consequence of significantly lengthening and deepening the recession. The rich set of empirical analyses that Mulligan presents in support of this argument challenges the view that the problem of recovering from the Great Recession remains solely one of insufficient aggregate demand. Moreover, the analysis will likely provide a foundation for future research on the Great Recession and how policymakers responded to it." —David Neumark, Chancellor's Professor of Economics and Director, Center for Economics & Public Policy, University of California-Irvine

"The endless campaign rhetoric on what to do about the recent recession left many wondering who or what was at fault. This book is an excellently researched attempt to provide an answer. Though the explanations and conclusions Mulligan presents are accessible to general readers, the methodology and econometric analysis require sophisticated training. This book provides a wealth of scholarly data and analysis...highly recommended."—CHOICE

"While by no means presenting the whole story (as Mulligan himself agrees), the book challenges many of the widely accepted views of the Great Recession... the book unquestionably presents serious economic analyses, thus taking the discussion to a more sophisticated level." —Journal of Regional Science

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