The Macroeconomic Dynamics of Labor Market Policies

Erik Hurst, Patrick Kehoe, Elena Pastorino and Thomas Winberry

No 33614, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a dynamic macroeconomic framework with worker heterogeneity, putty-clay adjustment frictions, and firm monopsony power to study the distributional impact of labor market policies over time. Our framework reconciles the well-known tension between low short-run and high long-run elasticities of substitution across inputs of production, especially among workers with different skills within a same education group. We use this framework to evaluate the effects of redistributive policies such as the minimum wage and the Earned Income Tax Credit. We argue that since these policies generate slow transition dynamics that can differ greatly in the short and long run, a serious assessment of their overall impact must take account of the entire time path of the responses they induce.

JEL-codes: E22 E24 J08 J42 (search for similar items in EconPapers)
Date: 2025-03
Note: EFG LS
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