Paolo Martellini

I am an Assistant Professor of Economics at the University of Wisconsin-Madison.

In 2020-2021, I was a Junior Scholar at the Federal Reserve Bank of Minneapolis.

I received my PhD in Economics from the University of Pennsylvania.

My research focuses on Macro, Labor, and Urban Economics.

You can download my CV here.

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Publications (including forthcoming)

Journal of Political Economy (Lead Article)

Abstract: For a search-theoretic model of the labor market, we seek conditions for the existence of a Balanced Growth Path (BGP), an equilibrium in which unemployment, vacancy, and workers' transition rates remain constant in the face of improvements in the production and search technologies. A BGP exists iff firm-worker matches are inspection goods, and the idiosyncratic component of productivity of a match is drawn from a Pareto distribution. Declining search frictions contribute to the growth of the economy with an intensity that depends on the tail coefficient of the Pareto distribution. A corollary of the theory is that market size does not affect unemployment, vacancy and workers' transition rates even with non-constant returns to scale in search. We develop a strategy to measure the rate of decline of search frictions, the returns to scale in search, and their contribution to growth.

The Economic Journal

Abstract: We revisit the hypothesis that labor market fluctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, fluctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.

American Economic Review: Insights

Abstract: Declining search frictions generate productivity growth by allowing workers to locate more quickly jobs for which they are well-suited. The return of declining search frictions on productivity varies across different types of workers. For workers who are jacks of all trades—in the sense that their productivity is nearly independent from the distance between their skills and the requirements of their job—declining search frictions lead to minimal productivity growth. For workers who are masters of one trade—in the sense that their productivity is very sensitive to the gap between their individual skills and the requirements of their job–declining search frictions lead to fast productivity growth. As predicted by this view, we find that workers in routine occupations have low wage dispersion and growth, while workers in non-routine occupations have high wage dispersion and growth.

Working Papers

Previously circulated as "The City-Size Wage Premium: Origins and Aggregate Implications"

Abstract: I propose a dynamic spatial equilibrium model that accounts for the heterogeneous labor market experience of workers across US cities. Productivity differentials between large and small cities emerge as an equilibrium outcome due to spatial sorting, increasing returns to scale in job search, and knowledge diffusion through local peer effects. The model delivers testable predictions with respect to selection into and returns to migration, which are supported by the data. I use this framework to quantify the aggregate implications of relaxing zoning regulation in large cities. I show how the resulting relocation of workers affects the size and composition of cities, the return from local interactions, and the spatial distribution of productivity. Failing to account for the impact of housing policy on local productivity would lead to overstating the magnitude of equilibrium income gains by a factor of 3.

HCEO Working Paper No. 2021-042

Abstract: We study the role of local institutions and regulations—school boundaries, school transportation provision, and zoning restrictions—in determining inequalities of educational opportunities for children. Motivated by our empirical findings on how the demand for both neighborhoods and schools responds to quasi-experimental variation in school quality and transportation, we build and estimate a spatial equilibrium model of residential sorting and school choice. We validate the model with our empirical quasi-experimental findings as well as with experimental estimates from an influential voucher program. We find that the evaluation of both people-based and place-based policies heavily hinges on spatial equilibrium effects. Abstracting from those would lead to either overestimating (voucher) or overturning (school choice expansion) the impact of these policies on the inequality of educational access.

R&R at Journal of Political Economy

Abstract: We measure college graduate quality — the average human capital of a college’s graduates — using the average earnings of its graduates adjusted to a common labor market. Our implementation uses the database of the website Glassdoor, which has the necessary information on earnings and education for non-migrants and migrants who graduate from roughly 3,300 colleges in 66 countries. Graduates of colleges in the richest countries have 50 percent more human capital than graduates of colleges in the poorest countries. Migration reinforces these differences. Poorer countries not only lose a higher share of their skilled workers, but their emigrants are highly positively selected on human capital. Finally, we show that these stocks and flows matter for growth and development by showing that college graduate quality predicts the share of a college’s students that become inventors, engage in entrepreneurship, and become top executives, both within and across countries.

Abstract: In this paper, we study firm dynamics and the allocation of capital in the private business sector. Two restrictions are imposed on transfers of business capital: (i) indivisibility—all assets in a business are sold as a unit; and (ii) bilateral trades— the terms of trade are settled in pairwise meetings. While the equilibrium features dispersion in marginal products as well as transaction prices per unit of capital traded, we show that the allocation is efficient. Dispersion in per-unit prices arises because of time-to-build concerns for productive owners and variation in market thickness across the size distribution of firms. Firms grow over the life in two ways: through internal investment and through purchases of other firms. Capital is gradually traded upwards over the life of a business, from owners with a low marginal product of capital to owners with a high marginal product of capital. The model is used to estimate the impact of capital gains taxation and the degree of transferability of private business wealth.