Micro Data For Macro Models

1. Micro Data For Macro Models Fall 2014 Lecture 1 (Prologue and Consumption Inequality)

2. Course Pre-Amble

3. 1998 – 2000 Cohort That Are Tenured at Top Schools (with some omissions because my memory is bad)

4. 1998 – 2000 Cohort That Are Tenured at Top Schools (with some omissions because my memory is bad)

5. Publishing? The median Ph.D. from a top 20 department never publishes anything in a peer reviewed journal The median peer reviewed article has less than 15 citations. See Dan Hamermesh’s web site for: “Young Economist’s Guide to Professional Etiquette” https://webspace.utexas.edu/hamermes/www/JEP92.pdf

6. The Good News The creation of research is a skill just like inverting a matrix, solving DSGE models, computing standard errors, etc. The more you work on it, the better you will become. Read the early work of those recently tenured at top schools. Every single one of you could have written the same papers. It is not only our technical prowess that distinguishes us throughout our careers, it is our ability to innovate and/or to come up with good questions. Those who have impact on the profession do so because of their ideas.

7. What Skill Are Ph.D. Students Most Deficient? Having the ability to identify interesting research questions The confusion of theoretical or empirical fire power as being an “end” as opposed to a “means”. Not having the ability to explain why anyone would care about their research.

8. Goal of This Class Get you to start thinking about writing your dissertation Familiarize you with many data sets that are used by macro economists (and others) to be used as part of your dissertation. Expose you to literatures within macroeconomics that have strong empirical components. Help you turn good research ideas into good research papers. Teach you how to communicate your ideas to others.

9. Some Housekeeping…. T.A.: Nick (with set up an email list for class participants including auditors) Lots of work – hopefully all of it useful o Reading o Homeworks o Virtual Paper Slides/Course Info (on my faculty web page) Co-Taught with Steve Davis: Timing (Steve’s slides/homework on Chalk)

10. My Portion of the Course: Household Datasets Topic 0: Prolouge Topic 1: Consumption Inequality Topic 2: Lifecycle Consumption Topic 3: Home Production Topic 4: Occupational Choice Topic 5: Regional Economics (may make this Topic 4, depending on timing) Topic 6: Understanding Small Businesses (if time allows)

11. Very Important Prelim 1) A completed research paper 2) Need two faculty readers. The primary reader has to be a professor who teaches in the empirical macro sequence (Steve, Erik, Rafael, or Joe). 2) Could be the completion of the virtual paper (subject to Erik and Steve’s approval). 3) You have to notify Erik by late April if you are planning to take the prelim, what the paper topic is, and who your readers are. See the syllabus for additional details. (Also need a B in all three courses)

12. Anatomy of Writing an Research Paper Identifying a research topic a broad level o What broad area of research are you trying to speak to? o What existing research is done on that literature? o Is it interesting to contribute an answer to this broad research question? Identifying a research topic in the narrow o What is the specific question you are trying to address? o What existing research is done on this specific question? o Is the answer to this specific question interesting? o Do you have a way to answer this specific question?

13. Anatomy of Writing an Research Paper Executing the specific research question o How do you tease out your mechanism from many other mechanisms? o What type of identification are you using to identify your mechanism (for empirical papers). o What drives that identification (for empirical papers). o Good questions without a good research design is just philosophy and/or killing trees. Conveying the output of the research o Your ideas need to be conveyed to others in order to have impact. o Main way in which ideas are conveyed: written research paper. o Seminars are another way to convey the research idea. o Need to be clear in both writing and verbal presentations.

14. Example of the Research Process Question in the Broad o Why has U.S. Labor Force Participation Rate (and Employment to Population Rate) fallen so sharply in recent years and remained at such a low level. a. Why is this question interesting? b. Is the fact true? Advice: It is always good to start your research process with interesting background facts.

15. Unemployment Rate: 1970M1 – 2014M7

16. Employment to Population Rate: Men

17. Employment to Population Rate: Women

22. Summary of Facts Non-employment rate for prime age workers started increasing in U.S. around 2000. (Moffitt, BPEA 2012). o The fact is particularly pronounced for lower skilled men and women. o Some increase for high skilled men as well.

23. Summary of Facts Non-employment rate for prime age workers started increasing in U.S. around 2000. (Moffitt, BPEA 2012). o The fact is particularly pronounced for lower skilled men and women. o Some increase for high skilled men as well. Research question in the broad: Why has the employment to population ration been falling? Can we move from a “research question in the broad” to a “research question in the narrow”?

24. Example of the Research Process 2. Question in the Narrow o How much can the recent decline in manufacturing employment explain the rise in non-employment of U.S. workers? o Why didn’t this effect show up sooner in aggregate statistics? o What is the mechanism by which a sectoral decline can lead to increases in non-employment? Hint: Can some preliminary data lend potential plausibility to this hypothesis?

25. ~1 Million Jobs Lost During 1980s and 1990s

26. ~1 Million Jobs Lost During 1980s and 1990s ~4 Million Jobs Lost Between 2000-2007 (Housing Boom Years)

27. ~1 Million Jobs Lost During 1980s and 1990s ~1 Million Jobs Lost After 2007 ~4 Million Jobs Lost Between 2000-2007 (Housing Boom Years)

28. U.S. Employment Trends for Non-College Men (age 21-55) Manufacturing + Construction Manufacturing Construction

29. U.S. Employment Trends for Non-College Men (age 21-55) Manufacturing + Construction Manufacturing Construction

30. Example of the Research Process 3. Going from research question to actual implementation….. o Can one construct a research design to test the specific research question? o What type of variation can help to test the hypothesis? o What assumptions are necessary to make this variation useful to test the hypothesis? - “Wish” criteria (what do you “wish” drives the variation). - “Plausibility” criteria (is your “wish” plausible).

31. Open Lecture Slides 1a The Lecture Slides “charles_noto_hurst_phd_lecture1.ppt” will go through the research design of my paper: “Manufacturing Decline, Housing Booms, and Nonemployment”

32. Goals of the Class Revisited Homeworks o The homeworks are designed to getting you thinking about the components of the research process. Virtual Paper Lectures o Steve and I will try to bring in our perspective on the research process through our discussions.

33. “Where Do Ideas Come From?” Question that Ph.d. students ask most. Where do ideas come from? o Reading literature (seeing holes in existing literature, being unsatisfied with the consensus views on a topic, etc.) o Trying to understand world around us (“What drives employment rates?”, “How would one measure policy uncertainty?”, etc.) o Exploring data sources (my work on time trends, etc.) o Talking with other graduate students! Pick projects you are interested in. If you are not interested in the answer to your question, no one else will be either!

34. Topic 1:Consumption Inequality

35. Part A:Background on Household Surveys(Nick will Expand on this in TA Sessions)

36. Micro Expenditure Data: Household Surveys Consumer Expenditure Survey (U.S. data) Starts in 1980 Broad consumption measures Some income and demographic data Repeated cross-sections Panel Study of Income Dynamics (U.S. data) Starts in late 60s Only food expenditure consistently Housing/utilities (most of the time) Broader measures (recently) Very good income and demographics Panel nature

37. Micro Expenditure Data: Household Surveys British Household Panel (British Data) o Panel data including income and expenditure Family Expenditure Survey (British Data) Bank of Italy Survey of Household Income and Wealth (Italian Data) o Panel data including income and expenditure There are others….many Scandinavian countries, Japan, Canada, etc. Even some developing economies have detailed household surveys that track some measures of consumption (e.g., Mexico, Taiwan, Thailand)

38. Micro Expenditure Data: Scanner Data Nielsen Homescan Data o Large cross-section of households o Very detailed level transaction data (at the level of UPC code) o Some demographics o Some panel component o Matches quantities purchased with prices paid o Covers most of the large MSAs o Measurement error? o Selection? o Coverage of goods?

39. Micro Income/Employment Data: Household Surveys Current Population Survey (CPS) o Usual data set used within U.S. to track labor supply and earnings. o Has panel component. o Can be found at www.ipums.org/cps/ PSIDCan be found at http://psidonline.isr.umich.edu/ Survey of Income and Program Participation (SIPP) o Four year rotating panel o Large sample sizes o Over samples poor Census/American Community Survey o Can be found at www.ipums.org

40. Part B:Trends in Consumption Inequality (Part 1)

41. Income and Consumption Inequality Large literature documenting the increase in income inequality within the U.S. during the last 30 years (Katz and Autor, 1999; Autor, Katz, Kearney, 2008) Consumption is a better measure of well being than income (utility is U(C) not U(Y)). Does income inequality imply consumption inequality? Depends on whether income inequality is “permanent” Depends on insurance mechanisms available to households Depends on other margins of substitution (home production, female labor supply, etc.).

42. Kevin Murphy’s Web Page

43. Kevin Murphy’s Web Page

44. Autor, Katz, Kearney (2008)

45. Why Do We Care About Consumption Inequality? Why is it important? o Learn about well being over time (economic growth, standard of livings, inequality, etc.). o Learn about insurance mechanisms available to households (public insurance, private insurance, etc.)? o Learn about the nature of income processes (more on this in the next set of lecture notes).

46. A Classic: Attanasio and Davis (1996)

47. A Classic: Attanasio and Davis (1996) A Short Discussion: The innovation of the Attanasio and Davis technique. The creation of synthetic cohorts from cross sectional data.

48. Krueger and Perri (2006) What they do: o Use data from the Consumer Expenditure Survey (CEX) to track the evolution of consumption inequality. o CEX is includes a nationally representative sample of households. - Designed to compute consumption weights for CPI - Short panel dimension (4 quarters) - Mostly used as repeated cross sections. - Includes detailed spending measures on expenditures by categories. o Use repeated cross sections to track consumption inequality.

49. Krueger and Perri (2006): What They Find

50. Krueger and Perri (2006): What They Find