While she's spent a combined 16 years working in either the Fed system or the White House, incoming Fed chair Janet Yellen has had an even longer academic career, starting as an assistant professor at Harvard, then moving to the London School of Economics, and in 1980 settling at the Haas School of Business at UC Berkeley. She's written a slew of widely cited papers, often collaborating with her husband, fellow Berkeley professor George Akerlof. Here are 17 of them that you ought to read.
1-3. "The fair wage-effort hypothesis and unemployment" (1990) / "Fairness and Unemployment" (1988) / "Efficiency wage models of unemployment" (1984)
These papers — all but the last co-authored by Akerlof — address what's known in the economics literature as "efficiency wage theory." That's the idea that paying workers more than the market wage boosts productivity and ends up being worth it for the employer. The famous example is Henry Ford's decision to pay workers enough to afford a Model T for themselves. However, efficiency wages can also result in involuntary unemployment, since they move wages away from the market equilibrium.
The first paper, Yellen's most-cited, builds a model in which the amount of effort that a worker puts into their job depends on the difference between the wage they're getting paid and what they perceive as a "fair wage." The bigger the discrepancy, the less hard they work. This model explains how efficiency wages could be worthwhile for employers but, unlike most economic models, builds heavily on social psychology and sociology for its foundations, citing a number of psychological experiments, theoretical sociological papers, and even the Bible (particularly the story of Joseph, he of the amazing technicolor dreamcoat) for inspiration. Daniel Kahneman, the eminent psychologist who won a Nobel in economics the year after Akerlof, is thanked for his help in putting the paper together. Interestingly, Akerlof and Yellen write, "In the existing literature this model most closely resembles [Larry] Summers'."
The second paper, written two years previous, presents an earlier version of this model. The third paper, which Yellen authored alone before either of her papers on the topic with Akerlof, reviews the literature on efficiency wages up to that point.
"Firms often sell their goods in packages," Yellen and her co-author, William James Adams (now at Michigan, and of no apparent relation to his musical namesake), write. "Sporting and cultural organizations offer season tickets, restaurants provide complete diners, banks offer checking, safe deposit, and travelers' check services for a single fee, and garment manufacturers sell their retailers clothing grab bags comprised of assorted styles, sizes, and colors."
So why do they do it? As Yellen and Adams note, a lot of economists have argued that this has to do with complementarity — it makes sense to sell goods that complement each other as a bundle — or with cost savings that comes from producing and selling these things together. They argue that a third, more nefarious explanation is at work: price discrimination. Bundling, they argue, allows businesses to split up customers into separate groups, and offer different bundles, with different prices, to each. That allows for a degree of price variability between customers that's unusual in consumer products, which helps out businesses.
Whether it helps out customers depends on the situation, and Yellen and Adams are clear that they don't think banning bundling is a good idea. The core problem is monopoly, and the solution is to make sure competitive markets exist for the products getting bundled. "What specifically, then, should governments do?" they ask. "Clearly they must embark on policies that achieve competitive supply of each decomposable good separately."
Co-authored with Akerlof, this is perhaps the most relevant paper Yellen wrote for understanding what she's likely to do at the Fed, not least because it's so recent. The paper is a critique of an argument made by Robert Lucas, the Nobel laureate who turned macroeconomics on its head with his mid-1970s critique of Keynesianism. Lucas was not only skeptical of the prescriptions traditional Keynesians proposed for combating economic downturns, such as fiscal stimulus. He also thought that they would be pointless even if they worked. The idea is that downturns are followed by upswings of equal size, and so the ebbs and flows of the business cycle sum to zero in the long run. If that's true, Lucas theorized, then the net cost of recessions and booms is zero, and so policies to stabilize the economy and end recessions are unnecessary.
Akerlof and Yellen think this gets it all wrong. For one thing, being unemployed during a downturn is worse than being unemployed during a boom. "Weeks of unemployment are likely to be more onerous in a trough than in a boom," they write. "Employment is correspondingly more beneficial in a bust than in a boom. Estimates of the welfare losses from the business cycle due to this latter effect alone are an order of magnitude greater than Lucas's estimate."
What's more, Lucas's central assumption, that booms and busts cancel each other out with or without stabilization policies, is wrong. Akerlof and Yellen quote a paper by their Berkeley colleague Brad DeLong and Summers to this effect: “…successful macroeconomic policies fill in troughs without shaving off peaks." If that's true, then stabilization can make income higher and unemployment lower if you look at both recessions and downturns. If that's true, it's hard to argue it's not worth it.
6-8. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?" (1985) / "A Near-Rational Model of the Business Cycle, With Wage and Price Inertia" (1985) / "Rational Models of Irrational Behavior" (1987)
These three papers, all co-authored with Akerlof, represent the couple's contribution to the development of what's now known as "New Keynesian" economics. After Lucas faulted Keynesianism for not connecting the ups and downs of the macroeconomy to individual-level economic behavior, Keynesians like Stan Fischer, Olivier Blanchard, Greg Mankiw, and David and Christina Romer started to try to bridge the gap by adding complications at the individual level that could add up to the big economic swings that Keynesian theory predicts.
Like most New Keynesians, Akerlof and Yellen rely heavily on "sticky wages and prices," or the idea that wages and prices for workers and goods are slow to adjust. If that's true, then you would expect Keynesian behavior in the macroeconomy. But they were more explicit than most of that school in emphasizing that this slow adjustment can only come about if businesses aren't totally rational, as psychological theory would predict. Mankiw and Blanchard tended to downplay this deviation from full rationality, but Akerlof and Yellen embrace it as key to the model. "The bad press that Keynesian theory has recently received from maximizing, super-rational theory is simply undeserved," they write in the third and last paper. "The assumptions required to motivate Keynesian economics are quite consistent with the behavioral regularities documented by psychologists and sociologists."
9. “What Makes Advertising Profitable?” (1977)
Co-authored with Adams, this is a pretty stirring indictment of advertising. They argue that advertising can be profitable if (a) a company is a monopoly or has some market power, and can use it to boost surplus or (b) if it shifts some surplus from consumers to the business, which can happen even without a monopolies. Neither monopoly nor shirking consumers is a particularly attractive mechanism. Yellen and Adams are hardly alone in indicting advertising for bad consequences. Other papers, they note, had already pointed out that advertising can pervert consumer tastes and create a barrier to new competitors. But even if those mechanisms aren't at work, they argue that advertising can still be bad. Even without those effects, a rational monopolist could supply too much advertising, supply it to the wrong customers, or create too many brands of a given product.
It's clear, however, that Yellen and Adams have problems with the social effects of advertising even apart from those included in the model. "Advertising can be used to make the poor desire, and the rich disdain, what the poor ultimately consume, and to make the rich covet what the poor cannot afford," they write. "The social consequences of living in such a socially stratified, conspicuous consumption society have not been accounted for in our model."
"As man does not live by bread alone, people do not quit only for wages." That line, the concluding one of this paper co-authored by Akerlof and Andrew Rose, is a great summation of the underlying thesis: if you take into account that some people get non-monetary benefits and costs from their jobs, a lot about the labor market (unemployment being mainly involuntary, quit rates being higher when unemployment is low, quit rates falling with job tenure, etc.) starts to make more sense. Akerlof, Rose, and Yellen build a model to illustrate this and check it against empirical evidence.
Co-written with Akerlof and Michael Katz and published in the midst of the welfare reform debate in the United States (and when Yellen was a Fed Governor), the paper aims to explain why out of wedlock births had grown considerably in previous decades. Neither of the two main theories advanced to explain it held up. Charles Murray's idea that generous welfare benefits to mothers caused the increase didn't hold up to even the lightest empirical scrutiny, and William Julius Wilson's theory that a decline in male employment (particularly black male employment) reduced the pool of marriageable men, causing the increase, didn't fare much better.
Instead, Akerlof, Katz, and Yellen propose that the increase was caused by the "technological shock" of legal abortion and widely available oral contraception. Before those were available, women who didn't want to have a child out of wedlock had to choose between sexual abstinence and marriage. Afterward, they had third and fourth options, which meant that women who would have previously had in-wedlock children were instead able to use birth control and abortion to avoid having children entirely. That meant that out of wedlock births grew as a share of total births, as in-wedlock births fell.
The technological shock had other effects too. It made it harder for women to convince men to marry them, which also could have increased out of wedlock births. Male behavior changed as well. "Moreover, their partners' degree of empathy and willingness to marry after the fact, may also have declined once it was apparent that the woman herself was unwilling to obtain an abortion," the write.
What does this all mean for policymakers? Well, turning the clock back on the pill isn't really possible, they argue. "From a policy perspective, attempts to turn the technology clock backward by denying women access to abortion and contraception is probably not possible, and even if it were possible, it would almost surely be both undesirable and counterproductive," they write. "On the contrary, efforts should be made to ensure that women can use the new technologies if they choose to do so." But they also take away from this study the conclusion that cuts to welfare for single mothers would be ill-advised. "Cuts in welfare, as currently proposed, would only further immiserize the victims," they write. "Such cuts would have little impact on the number of out-of-wedlock children while impoverishing those already on welfare yet further."
It's interesting that Yellen attacked a hallmark policy of the Clinton administration only a year before she'd become its chief economist.
Co-written with Akerlof, Rose, and Helga Hessenius, this paper tackles the question of how to reverse the severe depression that German reunification caused in the East. East German customers started buying Western products rather than domestic ones, and foreign buyers weren't purchasing East German goods either
The solution, they argued, was a big infrastructure spending program, to boost employment as well as attract private investment, as well as work subsidies. The main problem was that East German wages were too high for firms to be profitable, and cutting them enough to change that would immiserate the nation's workers. But Yellen and her co-authors argue that even extremely generous work subsidies — such as one equal to 75 percent of current wages — could even reduce Germany's budget deficit by reversing the depression and avoiding huge outlays in the form of unemployment and other benefits.
In reality, big infrastructure investment occurred but not wage subsidization of the scale this paper called for, which earned the German government sharp rebukes from other economists who had called for subsidies.
13. "Unemployment Through the Filter of Memory" (1985)
Here, Akerlof and Yellen construct a measure of the psychological painfulness of unemployment by comparing peoples' recollections of unemployment to their actual experience of it. If people are unemployed but don't recall or mention it when surveyed later on, that's a sign the period of unemployment wasn't that psychological harsh. If, however, they recall it, that suggests that it's been at the front of their mind for an extended period. The authors find that the salience of unemployment had fallen for younger and older workers in recent years, suggesting that it had become less painful. They attribute this to increased education (which makes young persons' unemployment less painful) and easier eligibility requirements for disability insurance (which makes older persons' unemployment less painful, at least for some subgroups).
14-5. "Factor Mobility, Regional Development, and the Distribution of Income"(1977) and "Consequences of a Tax on the Brain Drain for Unemployment and Income Inequality in Less Developed Countries" (1975)
Both co-authored with Rachel McCulloch (now at Brandeis), these papers concern developing countries and their attitudes toward the migration of residents to more developed countries. They argue that the main consequence of barriers to such migration is to benefit skilled workers in developing countries at the expense of unskilled ones. "Thee opposition of less developed countries to relaxation of immigration controls by advanced countries may be rationalized in terms of the redistribution of income from unskilled to skilled labor which would result from such a change," they write in the former paper. In the latter, they are explicit that taxing or otherwise deterring migration will likely result in increased income inequality in the developing country in question. Taken together, the papers are a powerful argument against the "brain drain" argument for preventing skilled immigration from developing to developed countries. For more on this topic, see Lant Pritchett and Michael Clemens.
This paper is way, way above my pay grade math-wise, but it's evidence that Yellen was very familiar with the arguments of the so-called "post-Keynesians," a left-wing heterodox economics movement that emphasizes the role or risk and irrationality in the economy, and tends to view financial instability as inherent to capitalism. For more on this topic, see my profiles of the Modern Monetary Theory movement and the UMass Amherst economics department.
17. "Waiting for Work" (1990)
Here, Yellen, Akerlof, and Rose look at the phenomenon known as "lock-in." Normally, when unemployment falls, the wages offered by firms increases, to reflect the decline in the supply of available workers. That means that those who take jobs in recession get lower wages. What's more, their wages later on don't rise as the economy starts to boom again — they're "locked in." Meanwhile, those who get jobs in booms are able to "lock in" higher wages. The authors model the phenomenon and then demonstrate that empirical evidence matches the theory.