We study the output responses to common fiscal policies in a macroeconomic framework with a frictional labor market, incomplete asset market and nominal rigidities. The framework admits data-consistent dynamics of hiring and firing and consumption responses to job loss, making it suitable for comparing the stabilizing effects of several household transfer policies and firm subsidies. Despite its richness, the model’s sequence-space representation is analytically tractable as a directed cycle graph between three blocks. This allows an 'information-poor' ranking of fiscal multipliers on the basis of their partial-equilibrium fiscal costs alone, and identifies their key determinants. A baseline calibration predicts large differences in fiscal multipliers across policies. Relative to an increase in government consumption, the efficacy of universal or conditional transfers to households hinges on the degree of partial consumption insurance (through marginal propensities to consume and the response of precautionary savings). The relative efficacy of firm transfers depends on the elasticities of vacancies and separations to job values, the marginal propensity to consume out of dividend income, and the degree of nominal frictions.

We introduce a simple generalization of the canonical permanent-transitory earnings process, a square-root process. The square-root process generates a Pareto tail in earnings and is able to match the dynamics of top-earnings inequality over the life cycle while retaining a good match to the covariance structure of earnings. By contrast, the canonical model fails to match the dynamics of top-earnings inequality over the life cycle. Since our square-root process is simple, with only one state variable, it can easily be used in structural macroeconomic models.

Do wage-contract rigidity and variable pay matter for the Diamond-Mortensen-Pissarides theory of unemployment dynamics? Hagedorn and Manovskii (2008) suggested using the volatility of real wages and steady-state level of tightness to infer the worker bargaining weight and outside option, and found that with this strategy, the DMP model does explain the observed volatility of unemployment. We assess whether this finding is robust to amending the model with rigid variable-pay contracts, following Broer, Harmenberg, Krusell, and Öberg (2023). For given parameters, neither contract rigidity nor variable pay affect unemployment dynamics, but they do affect wage volatility in response to a productivity shock. With a realistic degree of contract rigidity, and variable-pay contracts calibrated to explain intensive-margin fluctuations in hours worked, the calibrated model cannot explain the observed volatility of unemployment.

The unemployment-risk channel amplifies an initial contraction through a reduction in consumption demand by workers who fear unemployment. We show that the strength of this channel increases when accounting for the dynamic response of job separations and firm hiring to macroeconomic shocks. In response to identified demand and supply shocks, separation and job-finding rates are equally important in accounting for the overall unemployment response, but the job-finding rate responds with a sizable lag. When calibrating a tractable heterogeneous-agent new-Keynesian model with endogenous separations and sluggish vacancy creation to match these facts, we attribute twice as large a share of output fluctuations to the unemployment-risk channel relative to a more standard model with exogenous separations and free entry.

Aimed at pandemic preparedness, we construct a framework for integrated epi-econ assessment that we believe would be useful for policymakers, especially at the early stages of a pandemic outbreak. We offer theory, calibration to micro-, macro-, and epi-data, and numerical methods for quantitative policy evaluation. The model has an explicit microeconomic, market-based structure. It highlights trade-offs, within period and over time, associated with activities that involve both valuable social interaction and harmful disease transmission. We compare market solutions with socially optimal allocations. Our calibration to covid-19 implies that households shift their leisure and work activities away from social interactions. This is especially true for older individuals, who are more vulnerable to dis- ease. The optimal allocation may or may not involve lockdown and changes the time allocations significantly across age groups. In this trade-off, people's social leisure time becomes an important factor, aside from deaths and GDP. We finally compare optimal responses to different viruses (SARS, seasonal flu) and argue that, going forward, economic analysis ought to be an integral element behind epidemiological policy.

I introduce a simple model which endogenously generates a Pareto distribution in top earnings. Workers inhabit different niches, and the earnings of a worker is determined by the niche-specific supply of labor and a downward-sloping labor-demand curve. The highest paid workers are the ones that inhabit a niche with few other workers. A Pareto tail in earnings emerges as long as the labor-demand curve has a limit elasticity and the distribution of workers over niches satisfies a regularity condition from extreme-value theory, satisfied by virtually all continuous distributions in economics.

We adapt the wage contracting structure in Chari (1983) to a dynamic, balanced-growth setting with recontracting as in Calvo (1983). The resulting wage-rigidity framework dampens income effects in the short run, thus allowing significant responses of hours to aggregate shocks. In reduced form, the model dynamics are similar to that in Jaimovich and Rebelo (2009), with their habit parameter replaced by our probability of wage-contract resetting. That is, if wage contracts are reset frequently, labor supply behaves in accordance with King, Plosser, and Rebelo (1988) preferences, whereas if they are never reset, we obtain the setting in Greenwood, Hercowitz, and Huffman (1988).

Using an integrated epi-econ model, we compute the value of vaccines for Covid-19, both under a planner’s solution and in competitive equilibrium. The specific model, developed in Boppart, Harmenberg, Hassler, Krusell, and Olsson (2020), factors in not just value-of-life aspects along with standard economic variables but also the value of leisure activities that rely on a social component. We find that the societal value of vaccination is large; we estimate that, translated into monetary terms, the value of vaccinating one young individual in the competitive equilibrium is $17,800. Externalities are large: less than half the societal value is internalized by individuals (assuming that they act purely in their self-interest). Finally, behavioral responses are important, with a substantial share of the value of vaccines being attributed to people enjoying more socially-oriented leisure when more people are vaccinated.

I introduce a method for simulating aggregate dynamics of heterogeneous-agent models where log permanent income follows a random walk. The idea is to simulate the model using a counterfactual permanent-income-neutral measure which incorporates the effect that permanent income shocks have on macroeconomic aggregates. With the permanent-income-neutral measure, one does not need to keep track of the permanent-income distribution. The permanent-income-neutral measure is both useful for the analytical characterization of aggregate consumption-savings behavior and for simulating numerical models. Furthermore, it is trivial to implement with a few lines of code.

Extending the work of Atkinson et al. (2018), we decompose top-earnings gender disparities into a glass-ceiling coefficient and a top-earnings gender gap. The decomposition uses that both male and female top earnings are Pareto distributed. If interpreting top-earnings gender disparities as caused by a female-specific earnings tax, the top-earnings gender gap and glass-ceiling coefficient measure the tax level and tax progressivity, respectively. Using Danish data on earnings, we show that the top-earnings gender gap and the glass-ceiling coefficient evolve differently across time, the life cycle, and educational groups. In particular, while the top-earnings gender gap has been decreasing in Denmark over the period 1980-2013, the glass-ceiling coefficient has been remarkably stable.

In response to an adverse labor-market shock, a calibrated heterogeneous-agent model predicts that aggregate spending on durable goods falls mainly due to the ex-ante increase in income uncertainty caused by higher unemployment risk. In contrast, aggregate spending on nondurable goods falls mainly due to the ex-post income losses associated with realized unemployment spells. When households hold little liquid assets, the nondurable spending response is amplified, whereas the durable spending response is dampened. These differences stem from micro-level adjustment frictions involved in purchases of durable goods. The model is corroborated with evidence from micro survey data.

We discuss what tools would be useful in confronting epidemics, especially from the perspective of economics. Our main proposal is for policymakers to employ “epi-econ IAMs”: explicit Integrated Assessment Models, where epidemiology is integrated with economics. These models are under rapid development, but arguably not yet quite ready for quantitative use.

I use Danish administrative data 1980-2013 to study the underlying mechanisms generating fluctuations in income-shock moments. I partition the population into 37 narrowly defined educational categories and document the cyclicality of labor-income shock moments for each category separately. For the individual educational categories, mean income growth is strongly correlated with income-growth skewness, with an average correlation of 0.87 − 0.88. The connection between income-growth skewness and mean income growth is not only strong in the time dimension, but also in the cross section. Across the 37 educational categories, the correlation between mean income growth and income growth skewness is 0.93 − 0.96. Labor-market frictions together with variations in productivity growth can generate the relationship between mean income growth and income growth skewness. In a quantitative job-ladder model, variations in productivity growth quantitatively capture both the time-series and cross-sectional relationship.