Tuesday, February 14, 2012

Color Me Impressed: Supreet Kaur

As a student, being blown away by new information is a more common experience than for most individuals.  This is the purpose of my series "Color Me Impressed."  An economist who just amazes me so much with their writing that I can't help but share.

One of the problems with the recent contraction is that economists are constantly comparing it to a small number of other severe contractions.  Television personalities and economists alike try to fit this recession into the U.S. recession of the early 1980's or the Great Depression, often it ends up being a square peg in a round hole.  With such a small number of severe economic contractions, we're constantly reminded that crises are actually very idiosynchratic.

The truth is that despite GDP numbers bearing certain similarities, this most recent recession was not very much like the Great Depression or the recessions of the early 1980's.  Comparing them might not be very helpful, because of the large number of differences.  At the same time, we are using a lot of economic logic, based on these previous experiences, without really having a robust sample to see whether or not these theories work very well at all or whether they just worked that time.  The study of economics largely being based on the study of non-repeatable observations is a true thorn in the side of macroeconomists.

One of the issues that we have a great deal of theory about, but not very robust studies of is nominal price rigidity.  Many economists have pursuasively written about how price stickiness interplays with falling asset prices with regard to current and new contracts.  Supreet Kaur wrote a job market paper on that subject using more often repeated observations, disastrous rainfall in India.

In her paper, "Nominal Wage Rigidity in Village Labor Markets," Miss Kaur somewhat confirms our understanding and fills in significant details, especially with regard to the situation at hand, Indian land usage and its labor markets.  "In the presence of wage rigidity, volatility has an additional implication: production may often not be at the frontier because labor markets do not adjust to optimize fully in each period.  As implied by the employment results, this means rigidities may lower the levels and increase volatility of income and output - they may compound the adverse consequences of production volatility."  She goes on to suggest that "fairness norms" might be a good way to maintain stable real wages.

I enjoy the fact that she's found a larger sample size for unusual events.  General economic contractions might not be completely similar to regional weather events, but this is still a pretty good test, with worthwhile observations.  Overall, this is one of the better papers I've read all year, and I just can't help but be impressed.  She will be an economist to watch in the future.

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