Working Paper: NBER ID: w15681
Authors: Casey B. Mulligan
Abstract: The aggregate neoclassical growth model - with a labor income tax or "labor market distortion" that began growing at the end of 2007 as its only impulse - produces time series for aggregate labor usage, consumption, investment, and real GDP that closely resemble actual U.S. time series. Of particular interest is the fact that the model - with no explicit financial market - has investment fall steeply during the recession not because of any distortions with the supply of capital, but merely because labor is falling and labor is complementary with capital in the production function. Through the lens of the model, the fact the real consumption fell significantly below trend during 2008 suggests that labor usage per capita could get somewhat lower than it was at the end of 2009, and is expected to remain below pre-recession levels even after the "recovery."
Keywords: Labor Market Distortions; Recession; Investment; Consumption; Neoclassical Growth Model
JEL Codes: E13; E24; E32; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market distortions (J48) | decline in labor usage (J29) |
| decline in labor usage (J29) | decline in investment (E22) |
| decline in labor usage (J29) | decline in marginal product of capital (E22) |
| decline in marginal product of capital (E22) | decline in investment (E22) |
| prior accumulation of capital (E22) | consumption dynamics (E21) |
| labor distortion persistence (J79) | decline in consumption (D12) |
| labor distortion persistence (J79) | decline in investment (E22) |
| anticipated low levels of labor usage (J22) | consumption dynamics during recession (E21) |