Thursday, August 10, 2017

Macro in the Econ Major and at Liberal Arts Colleges

Last week, I attended the 13th annual Conference of Macroeconomists from Liberal Arts Colleges, hosted this year by Davidson College. I also attended the conference two years ago at Union College. I can't recommend this conference strongly enough!

The conference is a response to the increasing expectation of high quality research at many liberal arts colleges. Many of us are the only macroeconomist at our college, and can't regularly attend macro seminars, so the conference is a much-needed opportunity to receive feedback on work in progress. (The paper I presented last time just came out in the Journal of Monetary Economics!)
This time, I presented "Inflation Expectations and the Price at the Pump" and discussed Erin Wolcott's paper, "Impact of Foreign Official Purchases of U.S.Treasuries on the Yield Curve."

There was a wide range of interesting work. For example, Gina Pieters presented “Bitcoin Reveals Unofficial Exchange Rates and Detects Capital Controls.” M. Saif Mehkari's work on “Repatriation Taxes” is highly relevant to today's policy discussions. Most of the presenters and attendees were junior faculty members, but three more senior scholars held a panel discussion at dinner. Next year, the conference will be held at Wake Forest.

I also attended a session on "Macro in the Econ Major" led by PJ Glandon. A link to his slides is here. One slide presented the image below, prompting an interesting discussion about whether and how we should tailor what is taught in macro courses to our perception of the students' interests and career goals.

Monday, August 7, 2017

Labor Market Conditions Index Discontinued

A few years ago, I blogged about the Fed's new Labor Market Conditions Index (LMCI). The index attempts to summarize the state of the labor market using a statistical technique that captures the primary common variation from 19 labor market indicators. I was skeptical about the usefulness of the LMCI for a few reasons. And as it turns out, the LMCI is now discontinued as of August 3.

The discontinuation is newsworthy because the LMCI was cited in policy discussions at the Fed, even by Janet Yellen. The index became high-profile enough that I was even interviewed about it on NPR's Marketplace.

One issue that I noted with the index in my blog was the following:
A minor quibble with the index is its inclusion of wages in the list of indicators. This introduces endogeneity that makes it unsuitable for use in Phillips Curve-type estimations of the relationship between labor market conditions and wages or inflation. In other words, we can't attempt to estimate how wages depend on labor market tightness if our measure of labor market tightness already depends on wages by construction.
This corresponds to one reason that is provided for the discontinuation of the index: "including average hourly earnings as an indicator did not provide a meaningful link between labor market conditions and wage growth."

The other reasons provided for discontinuation are that "model estimates turned out to be more sensitive to the detrending procedure than we had expected" and "the measurement of some indicators in recent years has changed in ways that significantly degraded their signal content."

I also noted in my blog post and on NPR that the index is almost perfectly correlated with the unemployment rate, meaning it provides very little additional information about labor market conditions. (Or interpreted differently, meaning that the unemployment rate provides a lot of information about labor market conditions.) The development of the LMCI was part of a worthy effort to develop alternative informative measures of labor market conditions that can help policymakers gauge where we are relative to full employment and predict what is likely to happen to prices and wages. So since resources and attention are limited, I think it is wise that they can be directed toward developing and evaluating other measures.