WORKING PAPERS Archives - Coen Teulings

The distinction between Keynesians and Monetarists makes no sense anymore

April 2023

Abstract
The secular decline in real interest rates has invoked a fierce debate on macro policy over the past
decade. The distinction between Keynesianism and Monetarism is no longer useful. It makes more
sense to distinguish between those who hold that the decline in interest rates is due to shifts in supply
and demand of capital (referred to as Neoclassicals) and those who hold central banks responsible
(referred to as Neo-Austrians). Paradoxically, where Neo-Austrians are viewed as the ultimate believers
in the blessings of free markets, their position requires a strong scepticism on efficacy of capital
markets. Both views have widely different policy implications, both for the past decade of QE as well as
for central banks’ subsequent response to the outburst of inflation since the fall of 2021. The confusion
in the public is partly due to the disciplines adherence in its teaching programs to the quantity theory
of money. This theory is inconsistent with today’s payment system that is no longer based on bank
notes but on credits on cash-accounts.

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What is the optimal minimum wage?

Yujiang River Chen and Coen N Teulings

Centre for Economic Policy Research CEPR, Discussion Paper Series 10 February 2022

Abstract

The extensive literature on minimum wages has found evidence for the compression of relative
wages and mixed results for employment. This literature has been plagued by a number of
problems. First, the median-minimum wage ratio is used as the independent variable, where the
median is endogenous. Second, it is difficult to disentangle compression of relative wages and
truncation due to employment effects. Third, all effects are likely to depend on the initial level of the
minimum. Fourth, employment effects are likely to differ between worker types. We offer solutions
for these problems, by using instruments for the median, by using data on personal characteristics,
and by using a flexible specification. We apply our method to US data starting from 1979, allowing
for a wide variation in minimum wages. We find strong compression and positive employment
effects for the lower half of the distribution, persisting for quite high levels of the minimum.

Keywords: Minimum Wages, US, employment effects, wage dispersion, Wage Share

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The option value of vacant land: Don’t build when demand for housing is booming

Rutger-Jan Lange and Coen N Teulings

6 April 2021, CEPR Discussion Paper Series

Abstract

Urban structures and urban growth rates are highly persistent. This has far-reaching implications
for the optimal size and timing of new construction. We prove that rational developers postpone
construction not because prospects are gloomy, but because they are bright. The slow mean
reversion in urban growth rates for the Netherlands and the United States (estimated at ∼0.07 per
annum) implies that a substantial share of cities should optimally postpone construction due to
high growth. Observed heterogeneity in floorspace density across cities can be explained not by
differences in population levels, but in growth rates.

Keywords: real options, mean-reverting growth, Irreversible investment, real-estate construction,
urban growth

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Agglomeration and Sorting

Yujiang Chen and Coen Teulings, January 2020 [Preliminary]

Abstract

Recent papers suggest a strong interaction between agglomeration externalities and human capital. We develop a general equilibrium model with multiple regions where agglomeration benefits are increasing in human capital. Regions can either be organized as cities with a CBD or as rural areas. The city form is conducive to knowledge spill-overs but city size is limited by commuting cost. We estimate the model on US data on housing prices and wages for 47 states and 34 metropolitan areas from 1979 till 2015. We find strong support for the model. We use the model for the calculation of two counterfactuals: first without cities, and second without any agglomeration benefits. We find that land would loose half its value without cities and almost all its value without any agglomeration benefits.

Keywords: Spatial Sorting, Agglomeration externalities, Cities, Regional wage differentials, Regional house prices

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The option value of vacant land and the optimal timing of city extensions

Lange R.J., C.N. Teulings, The option value of vacant land and the optimal timing of city extensions, CEPR, April 4, 2018

Discussion Paper

The Urban economics of retail

Teulings C.N., I.V. Ossokina, J. Svitak, The Urban economics of retail, version August 12, 2016

Paper

Returns to on-the-job search and the dispersion of wages

Gottfries A, C.N. Teulings, Returns to on-the-job search and the dispersion of wages, version March 15, 2017

A wide class of models with On-the-Job Search (OJS) implies that workers gradually select into ever better-paying jobs. This process continues until a lay-off occurs, when workers have to go through this selection process from the start again. This process implies that workers’ expected wage increases gradually during their career, an increase that might be misinterpreted as a return to labour market experience. We develop a simple methodology to test these predictions and to disentangle the return to the OJS process from the general return to experience. Our inference uses two sources of identification to distinguish between returns to experience and the returns from OJS: (i) time-variation in job-finding rates due to business cycle fluctuations, and (ii) the time since the last lay-off; since the selection process restarts from scratch after a lay off, the fall in wages upon lay off is an empirical prediction from models with OJS that does not fit a general return to experience.

We refer to a sequence of jobs from the start of the career (or from the moment of a lay-off) till (the next) lay-off as an employment cycle. Due to the OJS selection process, the model predicts wages to increase gradually during an employment cycle. We show that conditional on the termination date of a job, the starting date of job should be uniformly distributed between the start of the employment cycle and the termination data of that job. The intuition is that the randomness of the arrival of job offers implies that we have no prior information whatsoever on the arrival time of the best job offer during the cycle, which is the job the worker currently holds. Hence, the starting date of the current job must be uniformly distributed. This is a strong prediction. We test this prediction, using data on the American labour market (NLSY 79). The prediction is shown to hold empirically.

Furthermore, we use the theory of extreme values of a set of random variables (in our case: the maximum) to derive the shape of the distribution of job offers. If the increase in the expected wage over the duration of an employment cycle converges to some bounded maximum, then the job offer distribution also has a maximum. If the expected wage keeps on increasing over the full duration of the employment cycle, the right tail of the job offer distribution is unbounded. Again, our empirical evidence gives a clear answer: the offer distribution is unbounded. Hence, pure sorting models cannot explain the data. In these models, workers seek a job that fit their aptitude best, e.g. a job of exactly the right complexity, not too complex, not too simple, which the maximum wage for each worker to be bounded. Our evidence suggest that wage offers follow a Gumbel distribution, which has a fat left tail.

We find remarkably strong support for all implications of the model. E.g. the model predicts that the rate at which wages increase during an employment cycle is the same across all cycles, whether it is the first (the start of the career) or e.g. the fourth (after three lay-offs). This prediction is supported by the data. Our methodology yields a simple and robust estimate for the standard deviation of the wage offer distribution, which is 7% for low skilled workers, and 15% for high skilled workers. For the high skilled workers, the standard deviation is substantially higher in cities than in the countryside, whereas this distinction does not make a difference for low skiled workers. The process of OJS affects leads to wage dispersion along three channels: first, the expected number of wage offers varies over the duration of an employment cycle; second, since the arrival of new job offers is random, the actual number of job offers differs from the expected number; and third, the quality of job offers differs (one being a better draw from the offer distribution than another). Altogether, these three factors account for a substantial part of the total dispersion of wages, roughly 10%. Similarly, OJS accounts for 30% of the experience profile. The average wage loss after lay-off is 11%. Search friction have therefore a major impact on labour market outcomes.

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Secular Stagnation, Rational Bubbles, and Fiscal Policy

Teulings C.N., Secular Stagnation, Rational Bubbles, and Fiscal Policy, working paper version September 30, 2016

In the debate on Secular Stagnation, usually interpreted as the steady decline in the real interest rate since 1990, people have worried about the risk of bubbles blowing up. Bubbles have a negative connotation for most people. They are considered as signals of irrational herd behaviour. Moreover, they pose a risk to financial stability, since they might burst. However, this interpretation is one-sided. Tirole (1985) has shown that bubbles can be fully rational when the economy is on stable growth path where return to capital r is equal to the growth rate g. If an asset is in fixed supply, then it might nevertheless carry a positive market price even when it does not yield any real dividend stream. The reason is that the demand for this -bubbly- asset will increase at a rate g along this stable growth path. Since its supply is fixed, its price has therefore to increase at rate g. Hence, buying bubbly assets is equally profitable as investing in physical capital, since r=g. In fact, in that case, trade in bubbly assets furthers efficiency as it allows the young to save for their retirement. When the demand for physical capital is too low to absorb all savings for retirement, bubbly assets might provide an alternative store of value. Then, trade in bubbly assets moves the economy to an efficient equilibrium that would otherwise be unattainable. Without trade in bubbly assets, resources would be wastefully spent on investment in capital with a low return.

The current paper considers a world where the expected return to capital fluctuates over time. Also in that case the availability of bubbly assets furthers efficiency. When the return to capital is expected to be low, the young buy bubbly assets instead. This will drive up the price of bubbly assets above its long run equilibrium value, thereby leading to a lower expected return, up till the point that the expected return to bubbly assets is equal to that capital. The high price of bubbly assets offers a windfall profit to the old, who use this windfall to raise their consumption during retirement. The fall in investment is therefore offset by a high consumption of the old. Exactly the reverse happens when the return to capital is expected to be high. We show that in this situation, trade in bubbly assets increases efficiency as it avoids people to invest in physical capital when its expected return is low. However, this trade does not return the economy to an efficient outcome, since the expected return to bubbles varies too much.

Next, we consider whether bubbles are the most efficient way of dealing with the variation in the expected return to capital, or that there are more efficient alternatives. In particular, one can wonder what is the best option: either the government issuing debt or trade in bubbly assets? Either the young buy bubbly assets from the old or the young buy bonds from the government where the government uses the receipts to repay the bonds held by the old. Both solutions transfer income from the young to the old. In a world of perfect information, both solutions are perfect substitutes. In a world where the future return to capital is uncertain, government bonds outperform trade in bubbly assets. When the expected return to capital falls, investment goes down. Hence, consumption must go up to offset the lower demand. With trade in bubbly assets, all fluctuations in consumption are born by the elderly, as they own the bubbly assets. When the government issues bonds, a fall in investment demand will reduce the interest rate. The government runs a surplus on its debt operations, since it gets a higher price for its new issuance of bonds. It can distribute this surplus among both the young and the elderly, thereby achieving a better spread of the shock in consumption between the young and the old. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers without government intervention, while fiscal policy implements intragenerational transfers, by giving the young tax relief during an investment slump as to increase demand at the expense of a lower future interest payments on their holding of government bonds. Sovereign debt is therefore a more efficient alternative than trade in bubbly assets.

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