Session 6: The Micro and Macro of Labor Markets

We develop a random search model of the labor market with two-sided heterogeneity and match-specific productivity shocks. Our model has two main predictions: i) there is positively assortative matching and ii) the average log wage that a worker receives is increasing in the worker’s and firm’s productivity and is submodular. Sorting and wages are driven by selection. All workers are equally likely to meet all firms, but low (high) productivity workers have a higher average log wage offer in low (high) productivity firms. The high wage offer meetings result in matches more frequently, generating positive assortative matching. Since only meetings that result in matches are observed in administrative wage data, such data contain only a selected subset of wage offers, and those turn out to be increasing and submodular. We show that our findings are consistent with results in the empirical literature and argue that the selection mechanism affects the interpretation of findings in that literature. First, firm fixed effects in wage equations do not have structural interpretation as firm wage premia because they are estimated with a bias due to selection. Second, while matching patterns are informative about productive complementarities, average log wages are not.

This paper evidences collusion among employers in the textile and clothing manufacturing industry in India. First, I develop a simple comparative static test to distinguish standard forms of imperfect competition from collusion. I show that, under very general labor supply and production structures, the spillover effects of firm-specific demand shocks predict opposite employment effects at unshocked competitors who operate independently (↓ employment), versus those who previously colluded but whose collusion dismantles due to the shock (↑ employment). Next, I argue that large employers in the garment industry organize into industry associations to pay workers exactly the state- and industry-specific minimum wage, using it as a focal point for coordination. Members of industry associations are substantially more likely to bunch from above at the local minimum wage than non-members, and to track its policy-induced rise without reducing employment. I show that small export demand shocks evoke the standard imperfectly competitive response among non-members (higher wages and employment), but elicit no response from members (they stick to the minimum wage). By contrast, when a large demand shock leads affected members to deviate from the minimum wage, unaffected employers outside the association respond as in oligopsony (↑ wage, ↓ employment), but unaffected members respond as if their collusion dismantles (↑ wage, ↑ employment). Imposing specific models of labor supply and production, the “full-IO” approach statistically rejects the oligopsony model in favor of the breakdown of collusion. I conclude that collusion spurs substantial losses even compared to a world wherein each firm exercises its own but not their collective market power, reducing the average worker’s wage by 9.6pp and employment by 17pp.

This paper studies the use of domestic outsourcing to circumvent labor regulations and its consequences for firms and workers. Drawing on longitudinal plant data and employer-employee data from Mexico, we first provide novel evidence on a phenomenon wherein many firms were outsourcing their entire workforce. These entities operated as empty establishments, with positive production and costs but no legally hired workers. We provide evidence that a central motive for this practice was to avoid mandatory profit-sharing with employees. We then leverage a reform that significantly restricted the use of outsourcing to understand the implications for both firms and workers when this practice is constrained. Using difference in differences design, we find that the reform caused firms to insource their workers and newly incur profit-sharing payments. We find no effect on total employment (composed of outsourced workers + in-house workers). Moreover, we find that treated firms offset the increase in profit sharing by a small decrease in wage growth relative to the control group. This decrease did not fully compensate for increases in profit sharing and total worker compensation for treated workers, i.e. wages + profit sharing, increased by around 3%. We provide a theoretical model to show that our results are consistent with a labor market where (i) firms offer workers a compensation bundle of wages and profit sharing (ii) outsourcing all workers allows firms to avoid mandatory profit sharing (iii) workers respond more to differences in wages than to differences in profit sharing when deciding where to work.

This paper proposes a unified analysis incorporating both consumer preferences and production technology to explain the secular rise of wage inequality in the United States. Utilizing household consumption data along with detailed industry employment data, I document that higher income households spend more on skill-intensive goods and services as a fraction of their total consumption. This fact implies that economic growth will result in greater demand for skilled labor. The paper then develops a multi-industry general equilibrium model featuring non-homothetic demand, industry-specific production technology and capital-skill complementarity. I quantitatively evaluate the sources driving the rise in the skill wage premium from 1982 to 2019. The results indicate that, while capital accumulation is the primary driver of the skill premium increase, the income-driven consumption channel operating through skill-neutral productivity growth contributes 5.5% to 6.1% to the overall rise in the skill premium.

We examine the equity-efficiency implication of information friction on teachers’ labor market. In our equilibrium model, schools make job offers to teachers they want to hire and each teacher—market incumbent and potential entrant—chooses her most preferred option feasible. The market is subject to information asymmetry between a teacher’s current employer and prospective employers, a friction that can be reduced by a transparent teacher evaluation system. We apply our model to data from Houston Independent School District, which launched a transparent teacher evaluation system in 2011. We estimate our model using the post-reform data and validate it using the pre-reform data. We use our estimated model to quantify the role of information friction on teacher-school sorting and how it affects the effectiveness of counter-factual bonus programs aimed at improving educational efficiency and equity.

This paper studies how the internal organization of firms interacts with labor and product markets using millions of task assignments within hundreds of hair salons. I develop a measure of organization complexity and provide evidence of firm-specific organization costs, which grant complex salons a comparative advantage in producing high-quality products. Based on these facts, I develop a model where oligopolistic firms with different organization costs choose their internal structure. Complexity is costly, but it allows firms to improve product quality by better matching workers with multidimensional skills to tasks. I characterize the profit-maximizing organization, and identify and estimate the model for Manhattan hair salons. Counterfactuals reveal that allowing internal organization to be heterogeneous and endogenous changes the equilibrium effects of policy. A sales tax cut increases specialization and therefore the productivity of all workers, while a minimum wage increase generates new types of wage spillovers.

We combine the Decennial Census, credit reports, and administrative earnings to create the first panel dataset linking parent’s credit access to the labor market outcomes of children in the U.S. We find that a 10% increase in parent’s unused revolving credit during their children’s adolescence (13 to 18 years old) is associated with 0.28% to 0.37% greater labor earnings of their children during early adulthood (25 to 30 years old). Using these empirical elasticities, we estimate a dynastic, defaultable debt model to examine how the democratization of credit since the 1970s – modeled as both greater credit limits and more lenient bankruptcy – affected intergenerational mobility. Surprisingly, we find that the democratization of credit led to less intergenerational mobility and greater inequality. Two offsetting forces underlie this result: (1) greater credit limits raise mobility by facilitating borrowing and investment among low-income households; (2) however, more lenient bankruptcy policy lowers mobility since low-income households dissave, hit their constraints more often, and reduce investments in their children. Quantitatively, the democratization of credit is dominated by more lenient bankruptcy policy and so mobility declines between the 1970s and 2000s.

Most U.S. states have a workforce development program that offers firms grants to fund training of new hires and existing workers. These training programs may help close skills gaps or may primarily serve local development goals. This paper explores the determinants and consequences of such programs. We create unique data linkages between participating firms and the Bureau of Labor Statistics business registry, as well as the Burning Glass job vacancy data (the near-universe of online job postings). We find that training grants are allocated to markets where firms face greater employee poaching risk and to larger higher-paying firms and markets. Using an event study and nearest-neighbor matching research design, we find that post training, firms experience growth in the number of postings and employees. Growth in job postings is concentrated in lower skilled front-line occupations, and even conditional on occupation mix, firms relax skill requirements after receiving a training grant. As such, program participation facilitates access to relatively high-quality firms. These low-skilled positions may complement those that received training or participating firms may have learned how to train workers themselves, rather than imposing up-front requirements. This collection of facts is consistent with the notion that these programs help overcome a market failure in updating worker skills.

In this paper we provide new estimates of the impact of unions on nonunion wage setting. We allow the presence of unions to affect nonunion wages both through the typically discussed channel of nonunion firms emulating union wages in order to fend off the threat of unionisation and through a bargaining channel in which nonunion workers use the presence of union jobs as part of their outside option. We specify these channels in a search and bargaining model that includes union formation and, in our most complete model, the possibility of nonunion firm responses to the threat of unionisation. Our results indicate an important role played by union wage spillovers in lowering wages over the 1980-2010 period. We find de-unionisation can account for 38% of the decline in the mean hourly wage between 1980 and 2010, with two-thirds of that effect being due to spillovers. Both the traditional threat and bargaining channels are operational, with the bargaining channel being more important.

This paper develops a macroeconomic model that combines an incomplete-markets overlapping-generations economy with a job ladder featuring sequential wage bargaining, endogenous search effort of employed and non-employed workers, and differences in match quality. The calibrated model offers a good fit to the empirical age profiles of search activity, job-finding rates, wages and savings, so that we use the model to examine the role of age and wealth for worker flows and for the consequences of job loss. We further analyze the impact of unemployment insurance and progressive taxation for labor market dynamics and aggregate economic activity via capital, employment and labor efficiency channels. Lower unemployment benefits or a less progressive tax schedule bring about welfare losses for a newborn worker household.

A number of influential papers study monopsony power in static models. Among the papers that model dynamics with a finite number of firms, none model the process of human capital accumulation by workers. In this paper, I show that this has important implications for the measurement and welfare consequences of monopsony power. How large are properly measured markdowns? And what are the welfare gains of implementing competitive allocations once we have accounted for human capital accumulation? To answer these questions, I introduce a novel model of dynamic monopsony in which a large non-atomistic firm competes with a finite number of homogeneous firms for workers who learn on-the-job. The markdown has an additional dynamic term reflecting expected future changes in worker human capital. I estimate the model using rich matched employee-employer administrative data from France and find that the welfare gains from forcing firms to offer workers their marginal product are large. Moreover, the welfare losses are underestimated by 81% when ignoring human capital accumulation.

We argue that the Cold War contributed to the equitable and tight labor markets of the post-war decades. On the labor-demand side, we isolate plausibly exogenous shifts in military procurement composition from “hot” wars or shifts in military weapons systems. For example, the mid-1950s-era shift away from traditional ordnance toward missiles and aircraft can explain almost 60 percent of the large decline in manufacturing jobs per capita in a Rustbelt state such as Michigan and nearly all of the rise in manufacturing per capita in a Sunbelt state such as Arizona. Overall, we estimate that the 1950s-to-1990s decline in defense production (from 5.6 to 1.8 percent of GDP) explains a significant share of the decline in manufacturing employment and the rise of top-ten income share. On the labor-supply side, the Cold-War-era draft removed millions of young men from the civilian labor force, even in peacetime. We estimate that the end of the draft in 1973 can explain nearly 80 percent of the rise in male age 18-24 unemployment over the next ten years. We then argue that the Cold War produced a working-class voting bloc in support of hawkish military policy and increase military spending. In the peak of the Cold War in the 1950s, we find that union members and residents of states receiving defense contracts differentially support both military intervention and greater government spending on the military. In particular, Democratic voters—overwhelmingly more working-class than Republicans at this time—were significantly more likely to support military intervention and spending than other voters, in strong contrast to voters for left and center-left parties in Western democracies without a large military-industrial complex (UK, France and Canada).