Essays on cost pass-through under changing economic conditions

Abstract

This dissertation consists of three essays. The first essay examines one of the most important questions in the business cycle literature: how consumer prices adjust to equilibrium after a cost shock to the economy. We consider tight credit conditions as a state affecting firms’ pricing decisions. As credit conditions change, so should the willingness of firms to leave their price unchanged in response to a large increase in the cost of production. This essay evaluates the hypothesis that cost shocks are passed on to consumers more quickly when credit conditions tighten. Using time series data from FRED on U.S. airfares, jet fuel prices, and credit conditions, we examine the effect of credit conditions on the pass-through of jet fuel price shocks to U.S. airfares over the period 1990–2019. We model the coefficients determining pass-through as a function of credit conditions at the time of the shock to jet fuel prices. We find evidence of much faster responses of airfares to jet fuel price shocks when credit conditions tighten. With normal credit conditions, cost pass-through is delayed by approximately eight months due to hedging practices, suggesting that hedging postpones, but does not eliminate, the transmission of cost shocks to airfares. The second essay examines whether the pass-through of jet fuel cost shocks differs systematically across high and low travel intensity seasons in the U.S. airline industry. Since factors such as route competition, capacity utilization, and airline pricing power vary systematically between peak and off peak travel periods as travel demand fluctuates, cost pass through may also exhibit seasonal variation. Using aggregate data on airfares and jet fuel prices, we estimate a structural vector autoregressive (SVAR) model and compute impulse response functions that vary by the month in which the shock hits. The results show that seasonality primarily affects the timing of pass-through rather than its long run magnitude. Fuel cost shocks are transmitted more rapidly when fares are set during peak travel periods, while adjustment is more gradual during off-peak periods. These findings highlight seasonality as an important determinant of fuel cost pass-through and suggest that ignoring seasonal demand conditions may obscure important patterns in airline pricing behavior. The third essay contributes to the literature on wage setting. The gender pay gap literature emphasizes that wage differentials are no longer primarily driven by human capital differences, but by workplace structures that reward long, inflexible work schedules while penalizing workers who value flexibility. Since high-skilled women, particularly those raising children, are more likely to demand flexibility, they are more exposed to these wage penalties. Increases in low-skilled immigration may relax their time constraints by reducing the cost of childcare through the expansion of low-cost household services. This paper examines whether low-skilled immigration affects the occupational inflexibility of high-skilled native women through this channel. We construct an index of occupational inflexibility using five occupation-level characteristics from O*NET and merge it with pooled individual-level data from the ACS.of 2009 and 2019. To address endogenous immigrant location choices, we employ a shift-share instrumental variable strategy. We find suggestive evidence that low-skilled immigration reduces childcare costs at the PUMA level. However, its effect on occupational inflexibility among high-skilled native women is negative but statistically insignificant. Heterogeneity analysis shows that the effect remains negative for women without children but turns positive for mothers, with the largest effects among those with at least one child under age five, though estimates are imprecise across all subgroups.