Aaron Steelman interviews Erik Hurst in Econ Focus, published by the Federal Reserve Bank of Richmond (First Quarter 2016, pp. 22-26). The brief overview preceding the actual interview describes some of the subjects covered:

\”Hurst has used regional data in a series of papers to look at other macroeconomic phenomena that would be hard to examine using national data alone. He also has done important work on household financial behavior — including consumption and time use over people\’s life cycles — and on labor markets. Business startups have been another interest of his: Much has been written about the importance of entrepreneurship to the U.S. economy, but what, he has asked, actually motivates people to open their own businesses? In addition, in a recent paper, he and co-authors have attempted to quantify how much the decline in barriers to employment of women and minorities has contributed to economic growth. Among his current research interests is explaining the decline in labor force participation among prime working age males.\”

Here are a few of Hurst\’s comments from the interview that caught my eye:

On who the entrepreneurs really are …

\”Most small businesses are plumbers and dry cleaners and local shopkeepers and house painters. These are great and important occupations, but empirically essentially none of them grow. They start small and stay small well into their life cycle. A plumber often starts out by himself and then hires just one or two people. And when you ask them if they want to be big over time, they say no. That\’s not their ambition. This is important because a lot of our models assume businesses want to grow. Thinking most small businesses are like Google is not even close to being accurate. They are a tiny fraction.

\”My work with Ben Pugsley has been emphasizing the importance of nonpecuniary benefits to small-business formation. Because when you ask small-business people what their favorite part of their job is, it\’s not making a lot of money. They do earn an income and they\’re very happy with it, but they get even more satisfaction from being their own boss and having flexibility and all of those other nonpecuniary benefits that come with being the median entrepreneur in the United States.\”

Wages may be flexible at the local/regional level, even if they appear stickier using national-level data. 

The facts are real wages moved very strongly with employment across regions. Nevada was hit very hard by the recession, for example, while Texas was hit much less hard. Wage growth, both nominal and real, was about 5 percent higher in Texas than it was in Nevada during the Great Recession. So if you\’re going to just correlate employment movements and wage movements, both real and nominal, at the local level, you see a pretty strong reduced form correlation.In the aggregate time series, you don\’t. Wages hardly moved at all despite employment falling pretty sharply. So there are some differences in the correlations between wages and employment at the local level and the aggregate level during this recession … When people say the reason we haven\’t seen real robust wage growth in the recovery is because wages were so sticky in the beginning period, I just don\’t think that holds water with the flexibility of wages that we see at the local level.\”

The Great Recession is over–for skilled labor.

\”There is a structural problem for prime-age, lower-skilled workers in the economy. If you take a look at people with a four-year college degree, you can barely see the effects of the recession any longer. There’s been no lasting effect on their employment rate. Almost all of the effect is concentrated among people with less than four-year college degrees.\”

Do the agglomeration benefits of urban areas come from production or from consumption?

\”Many urban models historically assumed that agglomeration benefits usually came from the firm side. Someone might want to be close to the center city, for instance, because most firms are located in the center city. So the spillover for the household was the commuting time to where the firms were, and the firms chose to locate near each other because of agglomeration benefits.

\”I have always been interested in it from another angle. When we all come together as individuals, we may create agglomeration forces that produce positive or negative consumption amenities. Thinking about it this way, when a lot of high-income people live together, maybe there are better schools because of peer effects or higher taxes. Or maybe there are more restaurants because restaurants are generally a luxury good. Or maybe there’s less crime because there is an inverse relationships between neighborhood income and crime, which empirically seems to hold. So, while we value proximity to firms, that’s not the only thing we value. How important are these consumption amenities? And more importantly, how do these consumption amenities evolve over time …\”

The interview also discuss the findings of several paper that appeared in the Journal of Economic Perspectives, where I work as Managing Editor, and which together give a sense of the breadth and depth of Hurst\’s work. (All papers in JEP, from the current issue back to the first issue in 1987, are freely available online compliments of the publisher, the American Economic Association.\”

In the Summer 2008 issue of JEP, Hurst co-authored a paper with Jonathan Guryan and Melissa Kearney on the subject, \”Parental Education and Parental Time with Children.\” Here\’s a comment from Hurst about this work in the interview:

\”[I]f you look at the income gradient of how we spend our time, the richer you are, the less home production you do. But the richer you are, the more childcare you do. So that income gradient between home production and childcare has opposite signs, which tells me it’s not exactly the same good. Whether that’s coming from the utility you get from being with your kids or whether it’s from investing in their human capital, that’s hard to say. We know people from high-income families go to school more, go to the doctor more, and spend more time with their families. So how much of it is investment, how much of it is home production, how much is leisure, I don’t know.

\”I have always advocated that you should have four uses of time — market work, home production, taking care of kids, and leisure — and then treat kids as somewhere between leisure and home production.\”

In the Spring 2016 issue of JEP, Hurst co-authored a paper with Kerwin Kofi Charles and Matthew J. Notowidigdo on the subject \”The Masking of the Decline in Manufacturing Employment by the Housing Bubble.\” Here\’s Hurst describing the paper:

\”The way I usually describe the paper, which I wrote with Kerwin Charles and Matt Notowidigdo, is to take two regions, Detroit and Las Vegas. Las Vegas has very little manufacturing relative to Detroit. Detroit didn’t have a big housing boom but Las Vegas did. … When you look at this early 2000s period, if you focus only on Detroit, you see employment rates going down, particularly among prime-age workers. It looks like there was a structural decline in employment well before the recession ever started. When you look at Las Vegas during the boom, the employment rate was well above long-run local averages. Normally, most people in their 20s and 30s work, but some of them don’t. During this period in Las Vegas, among lower-skilled workers in their 20s and 30s, nearly everybody was working. So when you put aggregate statistics together, when you sum together Detroit and Las Vegas, it looks like employment rates were relatively constant over this time period. But one was really low compared to historical levels, and one was really high relative to historical levels.

\”In this paper, we show that the decline in manufacturing that occurred during this period nationally — when you add in the Detroits, the Worcesters, and the Youngstowns — was masked by the aggregate housing boom in places like Las Vegas, Phoenix, south Florida, and some places in California that were growing well above average. Now one of these was temporary and one isn’t. The housing boom we know busted and then employment in Las Vegas plummeted. If you look at 2010 or 2011, the employment rate in Las Vegas is roughly the same as it was in 2000, meaning it increased and went back to trend, where the old manufacturing centers just continued declining relative to their 2000 level. You have a very temporary boom-bust cycle overlaid with a structural decline, and what you get is kind of a hockey stick pattern for the aggregate.

\”So for macroeconomists looking at the Great Recession, this is important for understanding why the employment rate hasn’t bounced back to its 2007 level. It shouldn’t have because 2007 wasn’t a steady state. In terms of policy implications, this means that monetary policy arguably is not an especially effective tool for strengthening the labor market. Instead, I believe you need to focus on retraining workers or investing in skills in some form. You might also want to look at disability and some other government programs that might act as a drag on unemployment.\”

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