Department of Economics, University of Minnesota,
Minneapolis, MN 55455.
Tue and Th 12:10 pm to 13:50. In Hanson Hall,
4-170. Off Hours: Before and after class and by
Phone-(612) 625-0941 Fax: (612) 624-0209
Fed Phone (612) 204-5528
The web page to sign up for homework presentations is
The course is over. Put in the directory a description of
your work and hopefully see many of you in the labor
What are we doing? A
class by class ex-post diary and a forecast of next class.
We talked about the class and what it is
about. We discussed what are the possible topics that we
will cover (see below) including the chapter Inequality in
Macroeconomics. We talked about what is labor about and
how to think of agents, households, people?
We started with various issues about wage determination
over ages. We talked about the hormone theory of wage
determination (wages are exogenous) and we started the
learning by doing. We finished attempting to develop the
FOC of the problem wrt hours worked.
Keaton helped us get the FOC in the
learning by doing environment that we finished. Thanks
Keaton. We then move to the Ben-Porath model and I left
the calculation of the FOC withhout derivatives of the
value function as a homework. After that we talked about
how to aggregate this Life Cycle model into a macro
model. First in St St, and then in a regular RCE. We then
discussed various items: survival and its markets, the
relation with the interest rate, social security, and I
left for people to
Bick and Choi on equivalence scales.
Jingyi talked about the Euler
equation of the learning by not doing problem. Thanks
Jingyi. We discussed the Bick and Choi piece of how to
think of muliperon households ``and we talked about why
would we need a notion of economies of scale and, also,
time varying utility weights. We then discussed how to
account for educational differences between boys and
girls. We also talked about a great new
paper on wage
by working in dense cities by Diego Puga and Jorge de
La Roca that deals with wages across large and small
cities and over the life cycle. Exciting stuff.
David Wiczer mostly talked about job
finding rates and unemployment duration and how one
calculates these in the CPS, even just taking it as a
repeated cross-section. In particular, we discussed the
increase in unemployment duration in this recession and
how it's mostly coming from the fall in the finding rate
of long-term unemployed.
We had an aside about synthetic panels in the CPS and I
how one can use this technique to answer questions of how
distributions evolve without having to follow particular
Then we talked about chaining the CPS and how that helps
one accommodate the fact that some unemployed people exit
the labor force.
Finally we talked about the PSID and I showed some
pictures about general occupational mobility. How, using
cohort and age variation we can see how the age-profile of
occupational switching probability has been changing over
Students wanted to talk a bit about linked
employee-employer data, so David is going to discuss that
a bit next time along with the SIPP and connecting
occupational mobility to unemployment duration. Part I of
Gustavo had the patience to put up with my
endless pestering to tell us how to solve the learning by
not doing model. Thanks Gustavo. I then started to talk
about using Euler equations in different contexts to learn
what people really like (Life insurance, health). In
particular, I talked about setting up a model where people
marry and divorce and form households albeit
exogenously. The gist of the class is to look at how
to model the details of how households differ from
people and how to model many details of how the family is,
to see how we can learn about how people are from the
things that they do, and to deal with the problem of how
to make decisions within a household when the members disagree.
Enoch presented the solution of the
problem of learning by doing. Thanks Enoch. We finished
the problem of the households using life insurance
these slides. We talked about sophisticated
multiperson households and many issues about how to solve
them and how to think of them. We discussed disagreement
within a household and the possible ways to get around it:
Pareto weights, bargaining. We then moved to health
these other slides. We started talking about the
longevity of people according to various socio-economic
We continued the discussion of how
health and mortality shapes people. I posed a couple of
homeworks related to doing calculations about the value of
life and optimality of investments. We discussed a few
possible explanations of why the educated live longer than
the uneducated. We also posed a human capital model on
investment in health and discussed what I called option 1,
a model without health modifiers that can be used to
estimate beta's by education level.
Understanding gross worker flows aross US states by
Daniele Coen-Pirani. We then moved onto what I called
option 2, How to estimate preferences that include a
health modifier. We also talked about a new homework, a
Life-Cycle version of Aiyagari.
stocks and socks by Martin Browning and Thomas
Crossley. Thanks Kailin. He may come back with some IV
notes. I then talked about a possible project to
understand the (lack of) wealth of the poor due to having
multiple people with claims to their assets. I also
started talking about Aggregate shocks in economies
without commitment. I
First Homework batch. Do
it by April 1, April Fools' day.
1.A Fetch and plot US quarterly GDP Employment,
Total hours worked, Hours per worker, Hours per adult of
working age and Hourse per person not in jail over 18
years of age both from CPS and from the firm survey (see
Cooley chapter 1, page 30). Store it in pdf, eps, and
emf or wmf formats. 1.B HP filter and plot US quarterly (log) GDP
and the series in 1.A. Store it in postcript or
pdf. Compute the same table as in the Cooley book for
those 4 variables using data up to 2003:4 or later.
1.C Calculate a linear trend and decompose log
GDP in the linear trend the hp trend and the hp
1.D Plot the growth rates together with the hp
residual and comment the differences.
1.E Compute a VAR of GDP, Total Hours and Labor
Productivity and plot the impulse responses. Make sure
that you explicitly state what are the identifying
assumptions that you make.
A life cycle problem.
2.A Solve for the assets and consumption of
the houeholds in an economy where they live 90 years
(assume they are born at 16) and have the wage
profile and of American persons. (Find it from
somewhere in the literature, later we will compute
it from data). Let the agents have standard per
period preferences over consumption with risk
aversion coefficient of 2, discount rate of 1. and
interest rate of 3\%. Plot them. You should use the
three methods we discussed in class to solve this
problem (if you want you can solve in five year
intervals, for which you have to adjust the interest
and discount rates). These methods were forward and
backward iterations that transform the problem into
one equation and one unknown and brute force.
2.B Now make changes in preferences so that
the induced profiles for consumption are inversed
U-shaped. Plot them too.
2.C Briefly explain the computational logic
that you followed. (I will talk a bit in class for
this but start now).
A more complicated life cycle
3.A Choose a learning-by-doing technology
(explain how you did so) and solve for the optimal
paths of consumption, savings hours worked,
productive hours worked and wages. Plot them. Do
they match the data?
Choose a Ben-Porath learning-by-not-doing
technology (explain how you did so) and solve for
the optimal paths of consumption, savings hours
worked, productive hours worked and wages. Plot
them. Do they match the data?
Specify a model with both a learning-by-doing and
a learning-by-not-doing technology (explain how
you did so) and solve for the optimal paths of
consumption, savings hours worked, productive
hours worked and wages. Plot them. Do they match
Discuss your findings
Second Homework batch. Do
it by April 17, Tax day.
Health and human capital.
4.A Say something inteligent about the value of
the life expectancy differential between college
graduates and dropouts. 4.B Pose a model of human capital investment in
health where the investments are in income and unpleasant
things and the differences across groups are in income
and preferences. Use the FOC to characterize the outcomes.
Third Homework batch. Do it by
May 1, Labor day (in the rest of the world).
Solving Life-Cycle decision rules in an Aiyagari
5.A Pose three processes from the literature of
earnings over the life cycle (actually some for earnings
and some for wages). Make sure that you understand why
you chose them. Such processes have to have some form of
Markovian representation. 5.B Solve Pose for the implied decision rules
of these households and describe the cross sectional
properties of the joint wealth and earnings distribution
both when leisure is in the utility and when is
not. Make sure that households can choose wealth in a
continuous manner. You could (but do not have to) use
piecewise linear decision rules. Approximate the wealth
distribution by say a very fine approximation of the
implied cdf or by generating large samples of
agents. Make sure also that you report many statistics
of this wage distribution.
5.C Comment the properties of such joint
distribution and compare them with that in US data, as
This course should be thought of as a Labor course with a
close link to Macro that should be of interest to people with
interest in both areas. Its main purpose is to learn the map
from models to data i.e. to answer quantitative questions that
we are interested in (in the process of doing so, some
interesting theoretical questions arise). We will develop
tools by stating general questions, and then discussing how to
approach its answer.
Tools. The tools that we will be
developing beyond those already covered in the first year
can be grouped into:
Theoretical tools. Not all the
necessary tools have been acquired in the first year. We
will look at models of individual decision making,
obviously, but mostly in the context of equilibrium models. We
will look at representative agent models, models with a
continuum of agents represented with measures, overlapping
generations models, as well as models where agents form
households. We will look at models where equilibria are
optima and where they are not. We will look at stationary
and non--stationary equilibria. We will look at models
without perfect commitment and without perfect
Empirical tools. A necessary condition to be able
to do applied theory is to be able to characterize
some properties of the world. This involves the
capability of accessing some data and of understanding
the way it is organized as well as the principles that
guide the construction of the main sources. This
requires some knowledge of NIPA and of the way data
Computational Tools. Students should be able to
construct and characterize the properties of the
equlibrium allocations of artificial model economies.
Calibration. We will spend a lot of
time thinking of how a model is related to the
data. This is I think the more important part of the
learning process. We will discuss this in much
This is a Ph.D. course not a Masters course. Not to learn
about others but to to do things, and, therefore, it
requires to do some things.
Every class except the first one we will devote the first
twenty minutes or so to students presentations of
homeworks. I expect professional competence in this regard.
Relation to 8501 and 8502. This
course complements those courses. We will overlap a bit with
enough differences to make them all worthwhile to the
enthusiast. Any one of them provides sufficient material, if
properly mastered, to pass the prelim.
Content. This year, I want to
organize this course a bit around the issues
of Inequality in
Macroeconomics. In terms of traditional content here is
a list of some of the issues that we may also cover. In the
end we will do a combo of both things depending on interest,
energy and mood.
Wage formation. Over ages,
education, sexes, occupation, marital status,
states, cities, what not.
Household Types. Single,
cohabitating, married, with children, with other
adults, with elderly, sharing dwellings. How does
it shape people?
Household Formation. How does
it change? How is it chosen? Both children and spouses.
Time Allocation. What do we do
with our time? Is labor/leisure useful?
Engagement in the labor market.
Female labor force participation, choices of hours,
Occupational Choice. What career
to choose (in a parallel sense). This includes
entrepreneurship, and even which legal status to
Crime. We will think of it in
part as a form of occupational choice (for property
crime). But we will also talk in terms of murder. How
could we think of it.
Savings and borrowing. With
special emphasis on the particular set of U.S. laws
that guarantee the right to bankruptcy.
Death and Health. Death is
unequal why people die? Does health care matter?
Aggregate Search Models. We will
look at how to build protoypical search models with
flows of workers entering and exiting the labor
Aggregate Fluctuations and Macro in
general. Are any of these things changing over
Students will place the solution to the homeworks and to
other requirements in electronic form.
You have to send an email ASAP to firstname.lastname@example.org
stating your name and university email and username and
that you are in my course to have access to a directory
named /pkg/8503-11 and a subdirectory your user
There are various types of requirements that are a necessary
part of the course, all of which have to be fulfilled.
Regular Homeworks.The ones posted
here. Full credit only if on time. Partial credit otherwise.
Class Presentations Every student
will make at least two class presentations with at least
one being of a subset of a homework. The first
presentation should take no more than 15 minutes and it
will be absolutely professional. Every second wasted,
every statement not planned, every bad thing will be
highlighted. The second presentation (that will depend on
class size and interests) maybe on a paper or on another
Referee Report. I will assign a
paper to each of you as we go along to write a referee
report and perhaps also to present the paper in no more
than 20 minutes. The refere report should be no longer
than five pages and should contain a clear and concise
exposition of the main points of the article as well as a
critical evaluation of the article's contributions. In
addition, you should write a letter to the editor with your
personal recommendations. If very good, I will use them,
Wikipedia Article. Optional, but
excellent training. This is something that should be done by
the end of the course. The moment you post it email me and
place a copy in your directory. Think of a topic of the
course no matter how silly.
This course believes drastically in Learning by Doing. To learn
the material that we cover requires that students do all the
homeworks in a timely manner. Given the way to collect the
homeworks, timeliness is automatically recorded. I will look at
what is done weekly.
Grading Rules and Registration.
To do superbly in the course, registered students have to do all
the requirements well.
For those that do not register but take the course, I recommend
that they do the homeworks. We learn to solve problems by facing
them. Learning jointly with others greatly speeds the
In any case, the University is to help you learn and become
a great economist not to issue grades, so use the course in
the way you say it is best for you. If all equal, register
so that there is evidence that the course is useful.
What about the prelim?
The prelim will consist on some problem or question or
discussion of something that has been at the core of the
course. Take a look at the last two prelims (from Kara, I think)
and the homepages of the courses of previous years (via my
homepage) for clues.