Session 11: Labor Markets and Policy Reforms

We investigate how market power affects wage inequality. Market power is driven by the market structure in the goods and the labor market as well as in the distribution of firm-specific technology. We ask how these contribute to the rise in the Skill Premium, the premium of the average college wage relative over the average non-college wage and within and between-firm inequality. We estimate the firm-specific technology as well as the market structure and find that the increase in market power contributes thirteen percent to the rise in the skill premium. We also find that it explains approximately half of the rise in between-firm wage inequality in the US. Market structure also accounts for the rise in the markup, as well as the decline in equilibrium wages and welfare.

This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers’ and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm’s productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium.

This paper studies the effect of the change in occupational structure on wages for low skilled men. We develop a model of occupational choice in which workers have multi-dimensional skills that are exploited differently across different occupations. We allow for a rich specification of technological change which has heterogenous effects on different occupations and different parts of the skill distribution. We estimate the model combining four datasets: (1) O*NET, to measure skill intensity across occupations, (2) NLSY79, to identify life-cycle supply effects, (3) CPS (ORG), to estimate the evolution of skill prices and occupations over time, and (4) NLSY97 to see how the gain to specific skills has changed. We find that while changes in the occupational structure have affected wages of low skilled workers, the effect is not dramatic. First, the wages in traditional blue collar occupations have not fallen substantially relative to other occupations-a fact that we can not reconcile with a competitive model. Second, our decompositions show that changes in occupations explain only a small part of the patterns in wage levels over our time period. Price changes within occupation are far more important. Third, while we see an increase in the payoff to interpersonal skills, manual skills still remain the most important skill type for low educated males.

In the first part of this paper, we document several novel facts about occupations, the life cycle and inequality using cross-section data from the CPS. First, a large portion of mean wage differences across occupations reflects differences in mean life cycle wage growth across occupations. Second, occupations that feature higher mean life cycle wage growth tend to experience a higher increase in cross-sectional wage dispersion over the life cycle. That is, differences in mean life cycle wage growth differences across occupations are driven by higher order moments of the life cycle wage distribution for older individuals; occupations with high mean life cycle wage growth tend to have a small mass of individuals who earn very high wages when old. These patterns hold for both males and females. In the second part of the paper, we present and estimate a simple two-occupation life cycle model that features learning by doing. We show that it can account for the key features of the data that we document even when the only source of comparative advantage in the model is with respect to learning ability across occupations. A key feature of our estimates is that the variance of learning ability is much greater in the high wage occupation than in the low wage occupation, though mean learning ability is modestly higher in the low wage occupation. Importantly, our estimates imply large selection effects with regard to life cycle wage growth across occupations. That is, although the observed life cycle wage growth for individuals is much greater in the high wage occupation, a randomly chosen individual from the low wage occupation will not achieve this rate of wage growth if switched into the high wage occupation. In the third part of the paper, we use our estimated model to carry out counterfactuals to assess how changes in the occupational employment structure affect overall inequality. A key finding is that mean occupational wages do not provide useful guidance for inferring the effects of changes in the employment distribution on overall wage inequality 

In this paper, we use the finite mixture approach of Bonhomme et al. (2019) and Abowd et al. (2019) to estimate a model of wages and employment mobility with two-sided heterogeneity that we particularize in two ways. First, we develop a new Classification Expectation-Maximization algorithm for estimation to improve the classification of firms into a finite number of groups. Second, we impose a parametric structure on workers’ transition probabilities for improved precision and interpretability. The major contribution of this research is showing that the process by which workers match with firms is convoluted and one cannot understand its sources by studying wages alone. Extending the study of sorting beyond the correlation of wage fixed effects, we also employ a broader notion of sorting, the mutual information (MI), which can accurately represent the dependence between worker and firm latent types independently of their effect on wages. Using Danish data from the years 1987􀀀2013, we find that it is important to allow for flexible interactions between job tenure, labor experience, and worker and firm types in both mean wages and employment mobility. Sorting is moderately increasing over time wherein some sorting is positive on wages. Through the lens of MI, we find increased importance of non-wage amenities as workers age and select into long tenure relationships. The job offer arrival processes while employed and unemployed are key drivers of sorting during early career stages. However, as workers age job preferences become the dominant determinant of matching and give rise to a positive age trend in sorting. The positive age trend in sorting shows in the MI index but is not noticeably apparent in the wage fixed effect correlation. It is, hence, important to allow for both non-wage factors and non-linearity in matching when measuring sorting.

We study a labor market characterized by search frictions, departing from most theoretical and quantitative studies by allowing firms to choose between posting non-negotiable wage offers and bargaining wages with individual workers. We use the model to study the positive and normative implications of heterogeneous wage-setting strategies in labor markets, as well as the potential effect of policies that seek to regulate wage-setting. We analytically derive - and empirically validate - a testable prediction from the model regarding the cross-sectional prevalence of bargaining and renegotiation of wages among workers. We then estimate the model and use it to evaluate counterfactuals in which either wage-setting procedure is mandated. We find that eliminating bargaining reduces the overall gender gap in wages by 6%, the education gap by 3%, and residual wage dispersion by 12%, while leading to welfare losses for workers. Similar numbers are observed when bargaining is mandated, with ensuing welfare gains for workers. Either policy raises output by 1-3% by eliminating inefficient job mobility, but accounting for firm responses in vacancy creation can overturn these effects.

This paper develops and estimates a dynamic model of student enrollment, school choice, academic achievement and grade progression to evaluate the impacts of Mexico’s conditional cash transfer program Prospera on educational outcomes over grades 4-9. Academic achievement is measured by nationwide standardized test scores in mathematics and Spanish. Enrollment decisions are the outcomes of sequential decisions at each age from persons’ feasible choice sets, determined by the types of schools locally available and local-labor-market opportunities. The achievement production function has a value-added structure. Model parameters are estimated by maximum likelihood using nationwide administrative test-score data (the ENCEL data) combined with survey data from students and parents, census labor-market data, and geocoded school location data. The estimation approach controls for selective school enrollment in different types of schools, grade retention and unobserved heterogeneity. The results show that the Prospera program increases school enrollment and academic achievement for program beneficiaries in lower-secondary school grades (grades 7-9). The average test score impacts are 0.09-0.13 standard deviations in mathematics and 0.03-0.05 standard deviations in Spanish. Students from the most disadvantaged backgrounds experience the largest impacts. The availability of telesecondary distance-learning schools is shown to be an important determinant of the Prospera program’s impacts on educational outcomes.

We study how Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income. Our analyses combine administrative data on U.S. lottery winners with an event-study design that exploits variation in the timing of lottery wins. Our first contribution is to estimate the earnings responses to these windfall gains, finding significant and sizable wealth and income effects. On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents. These effects are heterogeneous across the income distribution, with households in higher quartiles of the income distribution reducing their earnings by a larger amount. Our second contribution is to develop and apply a rich life-cycle model in which heterogeneous households face non-linear taxes and make earnings choices along both intensive and extensive margins. By mapping this model to our estimated earnings responses, we obtain informative bounds on the impacts of two policy reforms: an introduction of UBI and an increase in top marginal tax rates. Our last contribution is to study how additional wealth and unearned income affect a wide range of behavior, including geographic mobility and neighborhood choice, retirement decisions and labor market exit, family formation and dissolution, entry into entrepreneurship, and job-to-job mobility.

This paper examines a labor law reform implemented in Portugal in 2009 which restricted the use of fixed-term contracts in establishments created by large firms above a specific size threshold, covering about 10% of total employment. Drawing on linked employer-employee longitudinal data and regression discontinuity methods, we nd that, while the reform was successful in reducing the number of fixed-term jobs, it did not increase the number of permanent contracts and decreased employment in large firms. However, we nd evidence of positive spillovers to small firms that may bias reduced form estimates. To evaluate general equilibrium effects, we build and estimate a directed search and matching model with endogenous number of establishments and jobs. We find spillover effects that induce small biases on reduced form estimates but that significantly change the evaluation of the overall impact of the reform because they diffuse to the whole economy. We estimate that the reform slightly reduced aggregate employment and had negative effects on the welfare of employees and unemployed workers.

This paper analyses the marriage decisions of natives and migrants focusing on the role of legal status and cultural distance. We exploit the successive enlargements of the European Union as a natural experiment that granted legal status only to some groups of foreign immigrants. Using Italian administrative data on the universe of marriages and separations, we show that access to legal status reduces by 60 percent the probability of immigrants intermarrying with natives, and it increases by 20 percent the hazard rate of separation for mixed couples formed before legal status acquisition. Building on this evidence, we develop and structurally estimate a multidimensional equilibrium model of marriage and separation, where individuals match on observed and unobserved characteristics. Allowing for trade-offs between cultural distance, legal status, and other socio-economic spousal characteristics, we quantify the role of legal status and the strength of cultural affinity. Through the evaluation of counterfactual policies, we show that granting legal status to migrants to foster their inclusion in the legal labor market paradoxically slows down the integration of minorities along cultural lines. We also show how recent migration waves will foster a gender marital imbalance within those communities.

What is the optimal minimum wage? We provide a novel characterization of oligopsonistic labor markets under minimum wages with worker and firm heterogeneity. We then characterize how a macroeconomy with many such markets aggregates to yield two ‘wedges’ implied by minimum wages. The first is an aggregate shadow markdown, that narrows with minimum wage hikes, then tightens as many firms ration employment. The second reflects misallocation, which improves for small values of the minimum wage but steeply worsens at higher values. In our quantitative model, which features worker heterogeneity and replicates recent empirical papers in the minimum wage literature, these effects yield a hump-shaped profile of welfare with respect to the minimum wage.
 

We use population panel data on firms and workers in Norway to estimate how a firm's output, use of input factors, and payment to labor change in response to exogenous changes in revenues due to shifts in its product demand or productivity. These estimates allow us to draw causal inferences about how firms change the way they produce as they grow and why larger firms have lower labor shares. We develop and estimate a model to quantify the relative importance of three sources for variation in labor shares across firms: i) the shape of the labor supply curve facing the firm, ii) differences in the returns to scale between labor and other inputs, and iii) heterogeneity across firms in the output elasticities of input factors. We employ instrument variable strategies to isolate plausibly exogenous sources of variation in the revenues of firms. We compare these instrumental variable estimates to OLS estimates and document the biases that arise when using cross-sectional data to draw conclusions about how firms grow and why larger firms have lower labor shares.