Fatih Karahan

Job Market Candidate

Research:

Interests: Quantitative Macroeconomics, Labor Economics, Urban and Regional Economics, Search Theory

"Geographical Reallocation and Unemployment during the Great Recession: The Role of the Housing Bust" (Job Market Paper, with Serena Rhee)

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Abstract:

This paper quantitatively evaluates the hypothesis that the housing bust in 2007 decreased the geographical mobility of workers and exacerbated unemployment during the Great Recession. We document the following facts regarding this episode: i) ceteris paribus, unemployment increased more in Metropolitan Statistical Areas (MSAs) with larger housing busts, and ii) controlling for local economic conditions, out-migration rates were lower in MSAs with larger housing busts. We construct and calibrate a directed search model of local housing and labor markets and migration. The model is quantitatively consistent with the volatilities of unemployment and vacancies, the size of gross and net flows across MSAs, and the correlation between net flows and local unemployment prior to the recent recession. A housing bust decreases the amount of home equity and makes it harder to afford a new house after moving due to a down payment requirement. Some households in low productivity regions that would have moved absent the housing bust decide to stay and look for jobs in their local labor market. The model accounts for 88% of the increase in the dispersion of unemployment across MSAs and the entire decline in net migration during the Great Recession. We find that this mechanism explains around 17% of the rise in unemployment after accounting for the fall in labor productivity.

"On the Persistence of Income Shocks over the Lifecycle: Evidence, Theory, and Implications"

(with Serdar Ozkan, minor revision requested by the Review of Economic Dynamics)

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Abstract:

How does the persistence of earnings change over the life cycle? Do workers at different ages face the same variance of idiosyncratic shocks? This paper proposes a novel specification for residual earnings that allows for an age profile in the persistence and variance of labor income shocks. We show that the statistical model is identified and estimate it using PSID data. We find that shocks to earnings are only moderately persistent (around 0.75) for young workers. Persistence rises with age up to unity until midway in life. The variance of persistent shocks exhibits a U-shaped profile over the life cycle (with a minimum of 0.01 and a maximum of 0.05). These results suggest that the standard specification in the literature (with constant persistence and variances) cannot capture the earnings dynamics of young workers. We also argue that a calibrated job turnover model can account for these non-at profiles. The key idea is that workers sort into better jobs and settle down as they age; in turn, magnitudes of wage growth rates decline, thereby decreasing variance of shocks. Furthermore the decline in job mobility results in higher persistence. Finally, we investigate the implications of age profiles for consumption-savings behavior. The welfare cost of idiosyncratic risk implied by the age-dependent income process is 34 percent lower compared with its age-invariant counterpart. This difference is mostly due to a higher degree of consumption insurance for young workers, for whom persistence is moderate. These results suggest that age profiles of persistence and variances should be taken into account when calibrating life-cycle models.

"Returns to Skills and the College Premium"

(with Flavio Cunha and Ilton Soares, Journal of Money, Credit, and Banking, Vol. 43, pp 39-86.)

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Abstract:

A substantial literature documents the evolution of the college premium in the U.S. labor market over the last 40 years or so. There are at least three different interpretations of this fact: (1) Shifts in the relative supply of and demand for college versus high school labor; (2) Shifts in the relative supply of and demand for skills in the college versus high school sector; (3) composition effects. We investigate how each of these components contribute to the dynamics of the college premium and find that all three play a role, but the increase in the college premium is primarily driven by the first component. We also find that during the 1980s the college premium for high school workers diverged from the college premium for the college workers and a substantial fraction of gap that opens up is primarily due to the increase in the returns to cognitive skills.