Session 16: Labor Markets and Policies

We document systematic differences in wage and earnings inequality between and within occupations and show that these differences are intimately related to systematic differences in labor supply across occupations. We then develop a variant of a Roy model in which earnings are a non-linear function of hours, with the extent of this non-linearity differing across occupations. In our theory, the interplay between heterogeneity in tastes for leisure and occupational differences in non-linearities affects the sorting of workers. Moreover, this interplay is crucial to account for the facts on the distributions of hours, wages, and earnings within and across occupations.

The economic impact of sectoral technical change has long been recognized as an important phenomenon. However, the distributional welfare consequences of these changes are not well understood. To address this gap, we develop an analytical framework that jointly integrates supply-side and demand-side heterogeneity. Without imposing structural restrictions on the consumption and production sides, the framework identifies the key forces—in terms of consumer preferences and sectoral production functions—shaping the welfare effects of sectoral technical changes. We estimate key parameters and quantify the heterogeneous welfare effects of sectoral technical changes, revealing significant variation in their impact. Finally, we show how our general framework can be applied to other exogenous sectoral changes by analyzing the distributional welfare impact of sectoral demand shifters.

Adjustment to trade liberalization is associated with substantial reallocation of labor across firms within sectors. This salient feature of the data is well captured by models of international trade with heterogeneous firms. In this paper, we reconsider the adjustment of firms and workers to changes in trade costs, explicitly accounting for labor market frictions and the entire adjustment path from an initial to a final steady-state. The transitional dynamics exhibit rich patterns, varying across firms that differ in productivity levels and across workers attached to these firms. High-productivity exporters expand employment on impact. But among lower-productivity firms, some close shop on impact, others rehire some workers on impact and close shop at a later date, and still, other firms gradually reduce their labor force and stay in the industry. In these circumstances, jobs that pay similar wages ex-ante are not equally desirable ex-post because, after the trade shock, high-productivity incumbents pay higher wages and provide more job security than low-productivity incumbents. After calibrating the model, we provide a quantitative assessment of the importance of various channels of adjustment. We find that gains from trade due to a decline in the consumer price index overwhelm losses from wage cuts, job destruction, and capital losses of incumbent firms, and that these losses are increasing in the extent of labor market frictions. Additionally, we find that downward wage rigidity generates a trade-off between the workers' displacement rates and the labor income loss. On the one hand, it prevents low-productivity firms from cutting wages in response to increased competition and, therefore, reduces the income loss. On the other hand, more firms find it profitable to rehire some workers on impact, and, therefore, the temporary unemployment rates increase. The decomposition of dynamic gains from trade shows that although firms' profit is decreasing in the minimum wage, the total gains from trade can increase due to the reduction in labor income loss.

Exploiting variation across Swedish local labor markets between 1986 and 2018, I estimate that individuals are less likely to start new firms and switch employers in an older labor market. To account for these patterns, I propose an equilibrium theory of growth with frictional labor markets. On the one hand, workforce aging raises the level of output by increasing the share of people who have found a good match with existing production technologies. On the other hand, the higher opportunity cost of switching to new technologies discourages their introduction. The offsetting level and growth effects result in high growth through the 1990s, even though the rate at which new technologies are introduced declines monotonically since the 1970s. I estimate that it will be suppressed for the next 30 years. The lower growth rate in the older economy lowers welfare for labor market entrants, but raises the value of the high-productive jobs typically held by older individuals.

We study matching between heterogeneous agents when their types are private information. Competing platforms post terms of trade. Agents with private information choose where to search and form matches. Positively assortative matching arises when each market attracts only one type of agent. We characterize an equilibrium with positively assortative matching when one exists and provide sufficient conditions to ensure that matching is positively assortative in a limit with a vanishing role for platforms. When more desirable partners have a higher willingness-to-pay for matches, they pay high fees to platforms to avoid less desirable types. When more desirable partners have a lower willingness-to-pay, they match at a low rate to keep out less desirable types.

Using a large panel dataset of US workers, we calibrate a search-theoretic model of the labor market, where workers are heterogeneous with respect to the parameters governing their employment transitions. We first approximate heterogeneity with a discrete number of latent types, and then calibrate type-specific parameters by matching type-specific moments. Heterogeneity is well approximated by 3 types: αs, βs, and γs. Workers of type α find employment quickly because they have large gains from trade and stick to their jobs because their productivity is similar across jobs. Workers of type γ find employment slowly because they have small gains from trade and are unlikely to stick to their jobs because they keep searching for jobs in the right tail of the productivity distribution. During the Great Recession, the magnitude and persistence of aggregate unemployment are caused by γs, who are vulnerable to shocks and, once displaced, they cycle through multiple unemployment spells before finding stable employment.

We develop a theory of labor markets in a monetary economy with four realistic features: search frictions, worker productivity shocks, wage rigidity, and two-sided lack of commitment. Due to the non-Coasean nature of labor contracts, inefficient job separations occur in the form of endogenous quits and layoffs that are unilaterally initiated whenever a worker’s wage-to-productivity ratio moves outside an inaction region. We derive sufficient statistics for the aggregate labor market response to a monetary shock based on the distribution of workers’ wage-to-productivity ratios. These statistics crucially depend on the incidence of inefficient job separations, which we show how to identify using readily available microdata on wage changes and worker flows between jobs.