The Micro and Macro of Labor Markets

When is monopsonistic competition between firms a source of aggregate misallocations? To study this question, I develop a heterogeneous firm model featuring endogenously variable markdowns and markups, entry, and exit. I show how monopsony power manifests in aggregate distortions depending on how rents in labor and product markets affect private and social production incentives. When markdowns are homogeneous, monopsony power is not a distortion, while social efficiency further requires homogeneous markups. In general, elasticities related to labor supply and product demand determine how distortions from monopsonistic competition manifest in labor allocations across firms, the number of entrants, and selection. The model, thereby, highlights that assessing misallocations from monopsony requires accounting for firms’ product market power and vice versa. I use the model to show that these considerations have first-order implications for policy design and how market integration, i.e., trade, affects welfare and misallocations.

We develop a model of a frictional labor market with workers’ productivity and aggregate monetary shocks, sticky wages, and a two-sided lack of commitment between firms and workers. As a result of wage rigidity and limited commitment, inefficient endogenous separations arise. We characterize the equilibrium separation and job-finding rates analytically and show how to recover the unobserved steady-state distribution of the wage-to-productivity ratios. The latter is a sufficient statistic that summarizes the prevalence of inefficient job separations and the aggregate response of employment and real wages to a monetary shock.

This paper uses rich administrative and survey data from Sweden to study the predictability and determinants of long-term unemployment (LTU) over the period from 1992 to 2016. We use standard machine learning techniques to predict job seekers’ LTU risk and find substantial predictable heterogeneity. Compared to a prediction model, which only uses standard socio-demographic variables, a model that uses data on income, employment and benefit histories more than doubles the predictive power of LTU risk. Moreover, the estimated heterogeneity in LTU risk in the full model implies that at least two thirds of the observed duration dependence in job finding is driven by dynamic selection. Finally, we apply our prediction algorithm over the business cycle and find substantial heterogeneity in the cyclicality of LTU risk across individuals. In recessions, LTU risk is more compressed at the top of the distribution, suggesting a lower value of targeting unemployment policies.

This paper studies how increasing teacher compensation at hard-to-staff schools can reduce inequality in access to qualified teachers. Leveraging an unconditional change in the structure of teacher compensation in Per ́u, we first show causal evidence that increasing salaries at less desirable locations attracts teachers who score 0.45 standard deviations higher in standardized competency tests, leading to an average increase in student test scores of 0.33-0.38 standard deviations. We then estimate a model of teacher preferences over local amenities, school characteristics, and wages using geocoded job postings and rich application data from the nationwide centralized teacher assignment system. A policy that sets compensation at each job posting taking into account teacher preferences is more cost-effective than the actual policy in terms of reducing structural inequality in access to learning opportunities, and it possibly enhances the efficiency of the education system.

This paper examines how minimum wages change the allocation of hours across workers and the nature of low-wage work. We leverage information on more than 700 million daily worker shifts covering the entire US nursing home industry over the 2016-2019 period matched to more than 300 state, county, and city minimum wage changes. Higher minimum wages shift the allocation of hours at the firm level towards workers with high levels of firm-specific experience. The shift in the allocation of hours is due to greater retention amongst the most experienced workers and increased hours worked by individual workers. These hours responses undo about 40 percent of the estimated relative earnings gains between workers in the first and third terciles of tenure. Therefore, while higher wages increase the experience-adjusted amount of services provided, which may improve the consumer experience, they also attenuate relative earnings gains for new workers.

How does local labor market competition affect the wage distribution and job flows? Using administrative Norwegian data on job flows, employment, and wages, we document that in less competitive markets, firms pay lower wages, and wage dispersion and job flows are lower. Motivated by this evidence, we develop a dynamic general equilibrium search-theoretic model of the labor market that includes a finite number of firms. We show that our framework is capable of replicating the observed relationships between market concentration and both job flows and wages. We use the model to measure the effects of labor market competition on the wage distribution and welfare.

We argue that productive firms share rents with workers only in occupations where workers have individual hold-up power. We present a model of wage determination where firms produce using a novel generalization of Kremer (1993)’s O-ring production function. Workers have individual hold-up power if (i) labor is organized into distinct, differentiated positions (ii) the output of positions is individually complementary or “critical” in the production process, and (iii) skills are position-specific, i.e., skills are acquired on the job and are not transferable across positions or firms. If output losses from an unfilled position are larger at productive firms, incomplete contracts and on-the-job search incentivize productive firms to pay differentially high wages. We estimate individual worker hold-up power by occupation using the effect of worker deaths on firm profits in Danish administrative data and using a measure of within-firm, across-position task differentiation from US job posting data. High hold-up occupations exhibit both higher wage levels and higher long-run passthrough of permanent firm productivity innovations to wages, supporting the main model predictions. Accounting for heterogeneity in hold-up power across occupations has numerous implications for wage inequality: (1) greater employment of men in high hold-up occupations can account for one fifth of the Danish gender wage gap; (2) rising “superstar firms” increase wage inequality; (3) hold-up power decreases the responsiveness of wages to labor market slack.

Arrow (1963) hypothesized that demand-side moral hazard induced by health insurance leads to supply-side expansions in healthcare markets. Capturing these effects empirically has been challenging, as non-marginal insurance expansions are rare and detailed data on healthcare labor and capital is sparse. We combine administrative labor market data with the geographic variation in the rollout of a universal insurance program—the introduction of long-term care (LTC) insurance in Germany in 1995—to document a substantial expansion of the inpatient LTC labor market in response to insurance expansion. A 10 percentage point expansion in the share of insured elderly leads to 0.05 (7%) more inpatient LTC firms and four (13%) more workers per 1,000 elderly in Germany. Wages did not rise, but the quality of newly hired workers declined. We find suggestive evidence of a reduction in old-age mortality. Using a machine learning algorithm, we characterize counterfactual labor market biographies of potential inpatient LTC hires, finding that the reform moved workers into LTC jobs from unemployment and out of tthe labor force rather than from other sectors of the economy. We estimate that employing these additional workers in LTC is socially efficient if patients value the care provided by these workers at least at 25% of the market price for care. We show conceptually that, in the spirit of Harberger (1971), in a second-best equilibrium in which supply-side labor markets do not clear at perfectly competitive wages, subsidies for healthcare consumption along with the associated demand-side moral hazard can be welfare-enhancing.

This paper studies the interplay between how much workers value workplace flexibility, whether they have such amenities, and how the presence of amenities affects their wages. To overcome the challenge of eliciting quantitative measures of willingness to pay (WTP) at the individual level, we propose the use of dynamic choice experiments, a method which we call the Bayesian Adaptive Choice Experiment (BACE). We implement this method to collect data on the joint distribution of wages, work arrangements, and WTP for different forms of flexibility. We then introduce and estimate a model in which workers may face different prices for job amenities depending on their productivity, extending the Rosen (1986) model of compensating differentials. The model captures key patterns in the data, including (i) the relationship between wages and having amenities, (ii) inequality in workplace amenities across the earnings distribution even when workers value these amenities similarly, and (iii) the tradeoffs across different forms of flexibility. We use the estimates to explore the welfare consequences of workers facing different amenity prices.

How should the government respond to automation? We study this question in a heterogeneous agent model that takes worker displacement seriously. We recognize that displaced workers face two frictions in practice: reallocation is slow and borrowing is limited. We first show that these frictions result in inefficient automation. Firms fail to internalize that displaced workers have a limited ability to smooth consumption while they reallocate. We then analyze a second best problem where the government can tax automation but lacks redistributive tools to fully overcome borrowing frictions. The equilibrium is (constrained) inefficient. The government finds it optimal to slow down automation on efficiency grounds, even when it has no preference for redistribution. Using a quantitative version of our model, we find that the optimal speed of automation is considerably lower than at the laissez-faire. The optimal policy improves aggregate efficiency and achieves welfare gains of 4%. Slowing down automation achieves important gains even when the government implements generous social insurance policies.