Labor Markets and Policies

We develop a framework with rich worker heterogeneity, firm monopsony power, and putty-clay technology to study the distributional impact of the minimum wage in the short and long run. Our production technology is disciplined to be consistent with the small estimated employment effects of the minimum wage in the short run and the large estimated elasticities of substitution across inputs in the long run. We find that in the short run, a large increase in the minimum wage has a small effect on employment and therefore increases the labor income of the workers earning less than the new minimum wage. In the long run, however, the minimum wage has perverse distributional implications in that it reduces the employment, income, and welfare of precisely the low-income workers it is meant to help. Nonetheless, these long-run effects take time to fully materialize because firms slowly adjust their mix of inputs. Existing transfer programs, such as the earned income tax credit (EITC), are more effective at improving long-run outcomes for workers at the low end of the wage distribution. But combining existing programs with a modest increase in the minimum wage generates even larger welfare gains for low-earning workers.

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.

Inequality (in consumption, income, and wealth), generated as a result of incomplete insurance against idiosyncratic shocks, has become an important element in modern macroeconomic models. This paper focuses on the model’s labor supply predictions and how they compare to those in the corresponding frameworks where markets are not incomplete, with a particular interest in how hours worked are distributed across the population. Labor supply is typically viewed as embodying a strong income effect: in the King-Plosser-Rebelo description of labor-leisure preferences, the income effect of a labor-productivity improvement is as powerful as the associated substitution effect (along a balanced growth path), implying that more wealth makes a household work significantly less. Thus, inequality in wealth, everything else equal, has strong implications for the distribution of hours worked: richer households will work a lot less than will poor households. Of course, everything else is not equal: wealth is positively correlated with labor productivity, making the equilibrium wealth-hours correlation nontrivial. What is more, it turns out that the reasons behind why there is wealth inequality – we consider idiosyncratic productivity, discount-factor, and rate-of-return shocks – matters a great deal for how hours work are distributed in the incomplete-markets equilibrium compared to how they are distributed in the corresponding complete-markets (or planning) outcome.

This paper studies the long-run labor market effects of changes in the aggregate supply of skills, skill-biased demand shocks, and minimum wages. For that purpose, it builds a tractable general equilibrium model with worker and firm heterogeneity, monopsony power in the labor market, task-based production, and free entry of firms. In the model, the shocks affect the wage distribution not only through marginal products of labor but also through changes in the distribution of firm wage premiums across workers. Because of these "reallocation effects," a rising share of college workers might widen the average college premium instead of compressing it, and supply and demand shocks affect reduced-form measures of labor market sorting. In addition to the marginal productivity and reallocation channels, minimum wages cause disemployment of low productivity workers and increased employment of other workers due to monopsony power. The model is estimated using linked employer-employee data from Brazil, using regional and time variation for identification. The estimated model reveals substantial regional heterogeneity in the effects of minimum wages. It also shows that rising educational achievement dampened the adverse employment effects of a large increase in the national minimum wage from 2000 to 2012. Finally, skill-biased demand shocks led to rising assortativeness in the Brazilian labor market.

There is a long standing controversy over the magnitude of the Frisch labor supply elasticity. Macro economists using DSGE models often
calibrate it to be large, while many micro data studies find it is small.
Several papers attempt to reconcile the micro and macro results. We
offer a new and simple explanation: Most micro studies estimate the Frisch using a 2SLS regression of hours changes on wage changes. However, due to a little appreciated power asymmetry property of 2SLS that we clarify, estimates of the Frisch will (spuriously) appear more precise when they are more shifted in the direction of the OLS bias, which is negative. As a result, Frisch elasticity estimates near zero appear (spuriously) precise, while large positive estimates appear (spuriously) imprecise. This pattern makes it difficult for a 2SLS t-test to detect a true positive Frisch elasticity. Fortunately, the Anderson-Rubin (AR) test does not suffer from this power asymmetry problem. The AR test leads us to conclude the Frisch elasticity is large and significant in the NLSY97 data. In contrast, a conventional 2SLS t-test would lead us to conclude it is not significantly different from zero. Our application illustrates a fundamental problem with 2SLS t-tests that arises quite generally. This problem is severe when instruments are weak, but persists even if they are strong. Thus, we argue the AR test should be widely adopted in lieu of the t-test.

We analyze the joint life-cycle dynamics of labor market and mental health outcomes. We allow for two-way interactions between work and mental health. We model selection into jobs on a labor market with search frictions, accounting for the level of exposure to stress in each job using data on occupational health contents. We estimate our model on British data from Understanding Society combined with information from O*NET. We estimate the impact of job characteristics on health dynamics and of the effects of health and job stress contents on career choices. We use our model to quantify the effects of job loss or health shocks that propagate over the life cycle through both health and work channels. We also estimate the (large) values workers attach to health, employment or non-stressful jobs. Lastly, we investigate the consequences on health, employment and inequality of trend changes in the distribution of job health contents.

Recent work by Lippman et al. (2020) examines the effect of German reunification in 1989 on gender and family norms, and show that female labor supply varies with husband-wife relative wage more in the West than in the East. In this paper, we try to understand what factors explain this fact. We first construct a cultural identity index from the attitude questionnaire in the GSOEP, with significant overlapping across East and West. We then build a search-matching/Nash bargaining model of marriage formation and divorce, and intrahousehold resource allocation, assuming same preferences in East and West, conditional on heterogeneous wages, education and cultural identity. We estimate 4 independent models in four 7-year periods (1992-1998, 1999-2005, 2006-2012, 2013-2019) using the GSOEP. The fit is good, so we can use the estimated model to measure how much of the observed differences between East and West (time uses and marriage sorting) are due to differences and changes in education, wages and cultural identity. Cultural identity is found to be the main factor before education and wages. It explains half of differences in time uses and marriage sorting on observables between East and West. Identity also interacts with education and wages (another 50% reduction).

This paper investigates the effects of the Big Five personality traits on labor market outcomes and on gender disparities within a job search, matching and bargaining model with heterogeneous workers. In the model, parameters pertaining to productivity, job offer arrival rates, job dissolution rates and the division of surplus depend on worker education, cognitive skills, personality traits and other demographic characteristics. The model is estimated using a representative panel dataset, the German Socio-Economic Panel (GSOEP). Results show that both cognitive and noncognitive traits are important determinants of wage and employment outcomes. Higher levels of conscientiousness and emotional stability and lower levels of agreeableness increase hourly wages and promote greater job finding rates. A decomposition analysis shows that gender differences in two personality traits - agreeableness and emotional stability - primarily account for the gender wage gap and that their effect operates largely through a reduction in the bargaining power of women. Using results drawn from the clinical psychology literature, we find that a mental health intervention targeted at individuals with low levels of emotional stability could reduce the gender wage gap by from 2 to 5 percent and reduce wage inequality.

To answer the question whether managers are paid for market power, we propose a theory of executive compensation in an economy where firms have market power, and the market for managers is competitive. We identify two distinct channels that contribute to manager pay in the model: market power and firm size. Both increase the profitability of the firm, which makes managers more valuable as it increases their marginal product. Using data on executive compensation from Compustat, we quantitatively analyze how market power affects Manager Pay and how it changes overtime. We attribute on average 45.8% of Manager Pay to market power, from 38.0% in 1994 to 48.8% in 2019. Over this period, market power accounts for 57.8% of growth. We also find there is a lot of heterogeneity within the distribution of managers. For the top managers, 80.3% of their pay in 2019 is due to market power. Top managers are hired disproportionately by firms with market power, and they get rewarded for it, increasingly so.

This paper is part of a larger project that seeks to understand the relationship between hours of work and earnings both statically and dynamically. This particular paper focuses on the fact that cross-sectional dispersion in earnings increases substantially with age. We use a benchmark Ben-Porath model to study the extent to which dispersion in lifetime hours of work contributes to the increasing dispersion of earnings over the life cycle. Previous work has highlighted the role of dispersion in learning ability across individuals as a force that leads to increasing dispersion of earnings over the life cycle. Theoretically, dispersion in hours of work has similar effects to dispersion in learning ability. In our benchmark model calibrated to generate an empirically reasonable amount of dispersion in lifetime hours, we can account for the entire rise in the dispersion in earnings over the life cycle without any heterogeneity in learning ability. As a by-product of our analysis we generate a long balanced panel with individual data on hours and earnings from age 21 to 52 using data from the NLSY and document several novel facts.

Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, we contribute a framework in which more productive firms either hire many imperfectly substitutable worker types in-house by posting wages along a job ladder, or rent labor services from contractors who hire in the same frictional labor markets. Three implications arise. First, more productive firms are more likely to outsource to save on higher wage premia. Second, outsourcing raises output at the firm level. Third, labor service providers endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, we find empirical support for all three predictions in French administrative data. After structurally estimating the model, we show that the rise in outsourcing in France between 1996 and 2007 raised aggregate output by 3%, reduced worker wages by 2% and increased employment by 6%. Outsourcing ultimately benefits the average exposed worker but rarefies high-paying opportunities.