Faculty Spotlight: Erik Hurst

 

The London School of Economics (LSE) is hosting me while I work on my summer research and give talks throughout the region. I have presented my work at LSE, the University College of London, Oxford, and Essex. At the latter three, I presented my paper, "The Allocation of Talent and Economic Growth," which details the large gains, in terms of GDP growth in the US, that occurred because of declining labor market barriers to women and African Americans during the last five decades.

Erik Hurst is a macroeconomist at the University of Chicago’s Booth School of Business. The V. Duane Rath Professor of Economics and John E. Jeuck Faculty Fellow focuses on labor markets, housing markets, and household financial behavior. This summer, he is traveling around London giving a series of talks at a number of high profile schools and universities, while at the same time working on some exciting summer research projects.

How did you become interested in macroeconomics, and can you describe your journey from student to the prominent researcher you are today?

As an undergraduate, I started as an engineering major at Clarkson University in upstate New York. I knew I wanted to get a PhD. I liked the math of the physical sciences, but I was more interested in the questions asked of the social sciences. Economics was a perfect blend of math and interesting questions. I switched my major to economics and went directly into the PhD program at the University of Michigan.

You are spending some time in London this summer. Where have you visited, and what have you been doing?

The London School of Economics (LSE) is hosting me while I work on my summer research and give talks throughout the region. I have presented my work at LSE, the University College of London, Oxford, and Essex. At the latter three, I presented my paper, "The Allocation of Talent and Economic Growth," which details the large gains, in terms of GDP growth in the US, that occurred because of declining labor market barriers to women and African Americans during the last five decades.

You are investigating at least three new research ideas this summer. Can you share some insights into your in-progress work on wage stickiness?

Sure. Wage stickiness refers to our observation that wages do not change much over business cycles. This tendency was particularly apparent during the Great Recession, when employment fell sharply, but wages remained roughly constant. Stories about why wages remain sticky during recessions often stem from the belief that companies are reluctant to raise wages during economic downturns, while employees are similarly reluctant to take cuts.

I have partnered with ADP Payroll Services to anonymously measure wages and hours for a wide swath of the American population to determine, for individuals, how inflexible wages were through the Great Recession. I hope to be able to answer several questions by looking at payroll trends related to other aspects of the economy. For instance, I’m wondering how wages respond to labor market strength. No one has ever studied how flexible wages are as we go through a large recession. No one likes a wage cut, but it might not look so bad when the alternative is being unemployed.

You are also exploring the relationship between financial booms and productivity. Can you summarize your thoughts on the possible linkages?

Yes. My second research initiative this summer is in collaboration Amit Seru, formerly of Chicago Booth but now a professor at Stanford. We are investigating to what extent financial booms lead to periods of subsequent slow growth. Others have asserted that financial booms lead to recessions, followed by gradual growth, in part because banks are less willing to lend as they recover their positions.

We are working on the hypothesis that financial booms have a negative effect on productivity, an alternative explanation for why economies grow slower during the recovery. During the early 2000s, graduating classes at MIT, largely known for its exceptional science, technology, engineering, and math (STEM) programs, overwhelmingly went into finance. While finance is great, perhaps this shift of high-ability people from STEM fields to the finance sector has a measurable effect on productivity? Our goal is to test possible relationships between slow growth after financial booms and declines in innovation and productivity by linking the flow of people away from STEM with the number of patents by young people during the finance boom. Do we see missing patents for these cohorts?

Your work on labor supply may be able to shed light on some major sociological shifts occurring within a specific group in our workforce. Can you elaborate?

In my third summer project, I’m trying to understand the labor market and patterns in employment over the last 15 years in the US. Specifically, I’m interested in employment rates of young (in their twenties), non-college educated men. In prior work on changes in demand for low-skilled labor, the theory exists that as technology advances, both employment and wages fall due to decreased demand.

In this strand of my research, I’m almost flipping that theory on its head by asking if it is possible that technology can also affect labor supply. In our culture, where we are constantly connected to technology, activities like playing Xbox, browsing social media, and Snapchatting with friends raise the attractiveness of leisure time. And so it goes that if leisure time is more enjoyable, and as prices for these technologies continue to drop, people may be less willing to work at any given wage. This explanation may help us understand why we see steep declines in employment while wages remain steady – a trend that has been puzzling economists.

Right now, I’m gathering facts about the possible mechanisms at play, beginning with a hard look at time-use by young men with less than a four-year degree. In the 2000s, employment rates for this group dropped sharply – more than in any other group. We have determined that, in general, they are not going back to school or switching careers, so what are they doing with their time? The hours that they are not working have been replaced almost one for one with leisure time. Seventy-five percent of this new leisure time falls into one category: video games. The average low-skilled, unemployed man in this group plays video games an average of 12, and sometimes upwards of 30 hours per week. This change marks a relatively major shift that makes me question its effect on their attachment to the labor market.

To answer that question, I researched what fraction of these unemployed gamers from 2000 were also idle the previous year. A staggering 22% - almost one quarter – of unemployed young men did not work the previous year either. These individuals are living with parents or relatives, and happiness surveys actually indicate that they are quite content compared to their peers, making it hard to argue that some sort of constraint, like they are miserable because they can’t find a job, is causing them to play video games. The obvious problem with this lifestyle occurs as they age and haven’t accumulated any skills or experience. As a 30- or 40-year old man getting married and needing to provide for a family, job options are extremely limited. This older group of lower-educated men seems to be much less happy than their cohorts.

I am currently working to document this phenomenon, but there is a real challenge in determining what the right policy response might be to address the underlying issues.

Hurst’s work is part of a host of summer research activities highlighted in this series. To learn more, please visit our summer research hub.

—Tina Cormier