Session 12: The Micro and Macro of Labor Markets
Gregor Jarosch, Princeton University
Isaac Sorkin, Stanford University
The idea of this session is to bring together labor economists and macroeconomists with interests in labor markets with two goals. The first goal is to be a venue to discuss the latest research about labor markets. The second goal is to promote intellectual exchange among scholars working on similar topics, but with different approaches. Specific topics will depend on the submissions.
In This Session
Friday, August 28, 2020
Outside Options in the Labor Market
This paper develops a method to estimate the outside employment opportunities available to each worker, and to assess the impact of these outside options on wage inequality. We outline a matching model with two-sided heterogeneity, from which we derive a sufficient statistic, the “outside options index” (OOI), that captures the effect of outside options on wages, holding productivity constant. This OOI uses the cross-sectional concentration of similar workers across job types to quantify the availability of outside options as a function of workers’ commuting or moving costs, preferences, and skills. Higher concentration in a narrower range of job types implies lower OOI and higher dispersion across a wide variety of job types corresponds to higher OOI. We use administrative data to estimate the OOI for every worker in a representative sample of the German workforce. We estimate the elasticity between the OOI and wages using two sources of quasi-random variation in the OOI, holding workers’ productivity constant: the introduction of high-speed commuter rail stations, and a shift-share (“Bartik”) instrument. Using this elasticity and the observed distribution of options, we find that differences in options explain 30% of the gender wage gap, 88% of the citizen-non-citizen wage gap, and 25% of the premium for higher education. Differences in options between genders and education groups are driven mostly by differences in the implicit costs of commuting and moving.
Trade and Market Power in Product and Labor Markets
This paper studies the effects of endogenous firm-level market power in input and product markets on equilibrium prices and wages as well as the gains from trade using a general equilibrium model with heterogeneous firms. Firm-level prices and wages are functions of two endogenous distortions: (i) a markup of price over marginal cost that depends on product market shares and (ii) a markdown of wages relative to marginal revenue product that depends on labor market shares. Both distortions cause large firms to be too small relative to local labor market competitors compared to a setting with perfect competition in input and product markets. Opening to trade reallocates market shares in product and labor markets towards countries’ large firms, which can reduce misallocation but also increases the labor market power of these firms. After estimating the structural parameters of the model using Indian plant-level data, I show that accounting for endogenous labor market power implies only small welfare losses due to misallocation and therefore a negligible increase in the gains from trade. Trade has significantly larger effects on firms’ markups than on their markdowns. Nevertheless, because of the increase in large firms’ input market power, there is a redistribution of the gains from trade from wages to firm profits.
Labor Market Competition, Wages and Worker Mobility
I study how removing barriers to worker mobility impacts the local labor market. Exploiting a quasi-experiment in which French border commuters gained access to the high-paying Swiss labor market, I show that the market integration leads to improved labor market outcomes among non-movers, and particularly those who are low-skilled. The difference-in-differences research design compares treated French labor markets in the border area to Switzerland with a matched control group of labor markets located in other parts of France. The empirical results show that within the first three years, low-skill wages rise by 1.6 percent and lowskill employment by around 3 percent. The results are consistent with a framework of monopsonistic competition in the labor market where firms have some wage-setting power, especially in the low-skill labor market. In the framework, the labor market integration both increases the outside options of workers and makes the supply to firms more elastic, which raises wages and employment. Enhancing worker mobility may therefore have pro competitive effects on the labor market that reduce employers’ monopsony power and improve the labor market outcomes of workers.
Earnings Inequality in Production Networks
Recent research on firm-to-firm trade has documented a robust fact: there is substantial heterogeneity in buyer-seller linkages between firms. To what extent does this matter for the inequality of earnings for workers in the production network? We study this question using a novel combination of two administrative datasets from Chile: (i) employer-employee data from income tax records, merged with (ii) firm-to-firm transactions data based on valueadded tax records. We develop a new theoretical framework that has two key features that facilitate analysis of this rich data: (i) imperfect competition in labor markets for workers of heterogeneous ability, and (ii) monopolistically competitive firms that produce output by combining labor with inputs sourced from other firms in a heterogeneous production network. We show that several key parameters mediate the impact of the network structure on earnings: the labor supply elasticity, the elasticity of substitution between labor and intermediates, and the price elasticity of demand. We structurally estimate these parameters and use the model to quantify the importance of production network heterogeneity for earnings inequality by simulating counterfactual equilibria in which firms match with customers and suppliers at random. We find that firm heterogeneity of connectivity in the production network accounts for 41% percent of log earnings variance in Chile. Heterogeneity in matching with both customers and suppliers is quantitatively important, but heterogeneity in matching with suppliers is quantitatively more relevant in explaining earnings inequality.
Employer Market Power in Silicon Valley
The falling labor share of income in the US has renewed interest in employer market power. I examine an important case of such power: no-poach agreements through which technology companies agreed not to compete for each other’s workers. Exploiting the plausibly exogenous timing of a Department of Justice investigation, I estimate the effects of these agreements using double- and triple-difference designs. Data from Glassdoor.com permit the inclusion of rich employer- and job-level controls. Estimates indicate each agreement cost affected workers 2.6 to 4.0 percent of annual salary. Stock bonuses and worker mobility were also negatively affected.
Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry
The primary goal of our paper is to quantify the importance of imperfect competition in the U.S. construction industry by estimating the size of rents earned by American firms and workers. To obtain a comprehensive measure of the total rents and to understand its sources, we take into account that rents may arise both due to markdown of wages and markup of prices. Our analyses combine the universe of U.S. business and worker tax records with newly collected records from U.S. procurement auctions. We first examine how firms respond to a plausibly exogenous shift in product demand through a difference-in-differences design that compares first-time procurement auction winners to the firms that lose, both before and after the auction. Motivated and guided by these estimates, we next develop, identify, and estimate a model where construction firms compete with one another for projects in the product market and for workers in the labor market. The firms may participate both in the private market and in government projects, the latter of which are procured through first-price sealed-bid auctions. We find that American construction firms have significant wage- and price-setting power. This imperfect competition generates a considerable amount of rents, two-thirds of which is captured by the firms. Lastly, we use the estimated model to perform counterfactual analyses which reveal how increases in the market power of firms, in the product market or the labor market, would affect the outcomes and behavior of workers and firms in the construction industry.