Précis
Structural change and price changes
Job loss expectations and consumption
Structural change and price changes
Two key measures of the nature of price changes have themselves changed over the past 20 years, according to Jonathan L. Willis’s article in the Federal Reserve Bank of Kansas City Economic Review. He cites strong evidence of declines in quarter-to-quarter and year-to-year variability of inflation and somewhat less conclusive reports that the time it takes for the rate of price change to return to its baseline after an unexpected change may have been reduced. In the case of volatility, Willis notes that the average absolute change in quarterly rates of change in the core Consumer Price Index (CPI) has dropped from 0.32 percentage point in 1960–82 to 0.12 percentage point from 1983 to 2002. In a formal test of inflation’s persistence in which a value near 1 indicates extremely high persistence and 0 means no persistence, he reports that there was a break in the pattern of persistence in core CPI inflation in the third quarter of 1990. Before that break, the value of the test statistic was 0.90; after the break it was 0.77.
Willis, after acknowledging the role monetary policy may often be thought to play, concentrates on the possible structural drivers of the change he observes in inflation dynamics. There are three broad areas of structural change that Willis analyzes: input costs (such as compensation, financing, and materials), mark-up decisions, and price adjustment costs. In his view, "As a result of structural changes in the past 20 years, many firms have access to a more flexible supply of labor and a more stable source of financing for investment. Advances in information technology have improved the management of materials inventories. Combined with decreases in the costs of making price adjustments and increased competition, these changes have likely contributed to the observed decreases in persistence and volatility of inflation."
Job loss expectations and consumption
In a recent study, Melvin Stephens, Jr. of Carnegie Mellon University examined the degree to which individuals’ expectations regarding future job loss affect household consumption. As part of the study, he also measured the accuracy of those expectations.
Stephens describes his research in "Job Loss Expectations, Realizations, and Household Consumption Behavior" (National Bureau of Economic Research Working Paper 9508). The data for his analysis come from the Health and Retirement Study (HRS), which started in 1992 with a sample of households containing at least one person born between 1931 and 1941. The survey re-interviews the households every 2 years, and gathers a variety of information, including information on employment. Stephens’s analysis was restricted to men; totally, 2,643 men were in his sample, of whom 386 were displaced during the study period.
The results indicated that subjective job loss expectations do have predictive power with regard to future job loss. This is supported in a number of ways, including that nondisplaced workers on average had earlier reported a probability of job loss during the next year of 13.8 percent, while the displaced workers had reported a 32.3-percent probability.
After establishing the predictive power of job loss expectations, Stephens then turned to how these expectations affect consumption. One might think that households with a high expectation of a job loss would reduce consumption now, so they would not have to reduce it as drastically in the future given that a job loss occurs. However, the analysis does not suggest that such consumption smoothing takes place. Stephens looked at alternative ways to explain these findings, including one model in which "households wait until they experience a bad income realization before adjusting their consumption." Curiously, he does not seem to have considered that the composition of his sample may have affected his results. Most of the men in his sample were nearing retirement age, and may already have been anticipating a drop in income due to retirement. In addition, they are likely to have had more assets to draw upon to help maintain consumption in the face of a job loss than would many younger workers.
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