SEPTEMBER 4 2015

Gillian Tett, FT: Productivity paradox deepens Fed’s rate-rise dilemma. And while logic might suggest that innovation should boost productivity, the problem with new technology, as economists such as Andrew McAfee of MIT point out, is that it takes time for companies to harness. So, just as it took a couple of decades before computers raised US productivity trends, it might take time before the economy is truly boosted by today’s smartphones. If this theory turns out to be correct (as I suspect it is), it suggests that eventually those productivity numbers should rise sharply. The problem, however, is that it could take several years. Until then, better keep watching the productivity numbers — if nothing else, because they show that central banking is an art, not a science; especially when the time comes to change course.

Tim Harford, The Undercover Economist: The myth of the robot job-ocalypse. Private investment in computers and software in the US has been falling almost continuously for 15 years. That is hard to square with the story of a robotic job-ocalypse. Surely we should expect to see a surge in IT investment as all those machines are installed? Instead, in the wake of the great recession, managers have noted an ample supply of cheap human labour and have done without the machines for now. Perhaps there is some vast underground dormitory somewhere, all steel and sparks and dormant androids. In a corner, a chromium-plated robo-hack is tapping away at a column lamenting the fact that the humans have taken all the robots’ jobs.

Jonathan L. Willis, Guangye Cao, KC Fed: Has the U.S. Economy Become, Less Interest Rate Sensitive? Although monetary policy is an important tool for promoting price and economic stability, its efficacy can change over time. This article investigates the interest rate channel of monetary policy and, more specifically, the response of employment to changes in the federal funds rate. Analytical results suggest the interest sensitivity of employment has declined in recent decades for nearly all industries and for the overall economy. The article tests three possible explanations for the observed change in interest sensitivity. First, changes in the conduct of monetary policy do not appear to be responsible for the shift in interest sensitivity. Second, linkages between the short end and the long end of the yield curve along with linkages between financial markets and the overall economy have become protracted. Third, structural shifts have altered how employment changes at the industry level feed back to the aggregate economy. Overall, the findings suggest that the decline in the interest sensitivity of the economy is not due to changes in the conduct of monetary policy, but rather to structural changes in industries and financial markets. Future research should investigate whether and how monetary policy should adapt in response to these changes.

Joseph Tracy, Robert Rich, Samuel Kapon, Ellen Fu, NY Fed: Mind the Gap: Assessing Labor Market Slack. Indicators of labor market slack enable economists to judge pressures on wages and prices. Direct measures of slack, however, are not available and must be constructed. Here, we build on our previous work using the employment-to-population (E/P) ratio and develop an updated measure of labor market slack based on the behavior of labor compensation. Our measure indicates that roughly 90 percent of the labor gap that opened up following the recession has been closed.

Alan Auerbach, Yuriy Gorodnichenko, NBER: How Powerful Are Fiscal Multipliers in Recessions?    During the Great Recession, countries around the world adopted expansionary fiscal policies aimed at counteracting the large negative shocks to their economies. These actions occurred in spite of skepticism among many economists about the potential of fiscal policy to stimulate economic activity. The results of our and related work suggest that fiscal policy activism may indeed be effective at stimulating output during a deep recession, and that the potential negative side effects of fiscal stimulus, such as increased inflation, are also less likely in these circumstances. These empirical results call into question the results from the new Keynesian literature, which suggests that shocks to government spending, even when increasing output, will crowd out private economic activity. While there has been some recent progress providing a rationale for large multipliers when economies confront a binding zero lower bound on interest rates, our findings apply to more general recessionary conditions, and thus present a challenge for the development of new models that, like the simple traditional Keynesian model, can encompass positive fiscal multipliers for private activity.

Roland G. Fryer, Jr., Steven D. Levitt, John A. List, NBER: Parental Incentives and Early Childhood Achievement: A Field Experiment in Chicago Heights. This article describes a randomized field experiment in which parents were provided financial incentives to engage in behaviors designed to increase early childhood cognitive and executive function skills through a parent academy. Parents were rewarded for attendance at early childhood sessions, completing homework assignments with their children, and for their child’s demonstration of mastery on interim assessments. This intervention had large and statistically significant positive impacts on both cognitive and non-cognitive test scores of Hispanics and Whites, but no impact on Blacks. These differential outcomes across races are not attributable to differences in observable characteristics (e.g. family size, mother’s age, mother’s education) or to the intensity of engagement with the program. Children with above median (pre-treatment) non cognitive scores accrue the most benefits from treatment.

Josh Bivens, Lawrence Mishel, EPI: Understanding the historic divergence between productivity and a typical worker’s pay. Why it matters and why it’s real. Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economywide productivity. In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7 percent, or 0.20 percent annually, over this same period, with essentially all of the growth occurring between 1995 and 2002. Another measure of the pay of the typical worker, real hourly compensation of production, nonsupervisory workers, who make up 80 percent of the workforce, also shows pay stagnation for most of the period since 1973, rising 9.2 percent between 1973 and 2014. Again, the lion’s share of this growth occurred between 1995 and 2002.

Will Knight, MIT Technology Review: New Boss on Construction Sites Is a Drone. Drones are being used to capture video footage that shows construction progress at the Sacramento Kings’ new stadium in California. Once per day, several drones automatically patrol the Sacramento work site, collecting video footage. That footage is then converted into a three-dimensional picture of the site, which is fed into software that compares it to computerized architectural plans as well as a the construction work plan showing when each element should be finished. The software can show managers how the project is progressing, and can automatically highlight parts that may be falling behind schedule.