Hysteresis via Endogenous Rigidity in Participation and WagesWage Contracts, Inequality and Labor Share
(with David Lopez-Salido)
Abstract: A substantial body of empirical literature shows that high unemployment, falling wages, and reduced economic activity can have lasting consequences: hysteresis. We model hysteresis as resulting from a coordination failure among atomistic firms and workers in a frictional labor market that features random search, ex-ante wage commitments, and the possibility of worker non-participation. This coordination failure results in a continuum of possible (fragile) equilibria with high-labor-demand equilibria welfare dominating low-labor-demand equilibria. We then introduce changes in labor productivity and specify a protocol for revelation of the new equilibrium such that the model exhibits periods of endogenous wage rigidity and persistent changes in labor force participation in response to transitory movements in labor productivity. The model is consistent with a host of medium-run and business cycle facts following a severe recession: outward shifts in the Beveridge curve, cyclical shift toward long-term unemployment, both jobless and wageless phases of recovery, and a reduction in the sensitivity of wages to unemployment. Furthermore, expansions are insufficiently robust and in this sense recessions are scarring.
* Formerly circulated as "Labor Demand Management in Search Equilibrium"
Abstract: Since the mid-1970s Germany and other developed countries have experienced an increasing income inequality (Card, Heining and Kline, 2013; Lemieux, 2008) and a decreasing share of output paid as labor compensation (Karabarbounis and Neiman, 2014; Elsby, Hobijn and Sahin, 2013). Various economic theories have been put forward in order to explain these shifts: substitution of capital for labor, technological change, international trade and globalization, changing wage setting institutions. I study these trends in the context of an on-the-job search model with heterogeneous wage contracts. In the context of this model, a secular shift toward employment contracts with upwardly-renegotiable wages is consistent with the observed shifts in inequality and the share of output paid to labor. Changes in the flexibility of wage contracts are inferred from changes in the propensity for upward wage-revisions for German workers 1975-2010 in a two percent random sample of social security records: Integrated Labor Market Biographies (SIAB). I find a secular trend toward upwardly flexible wage contracts which accelerates in the 2000's. This matches well with inequality and labor share trends in Germany over the same horizon.
Wage dispersion with heterogeneous wage contracts
(full text) (updated March 26, 2015)
Abstract: I study a labor market in which identical workers search on- and off-the-job and heterogeneous firms employ using either a posted wage or a wage contract contingent on outside options. Firm level costs for contingent contracts generate a separating equilibrium in which less productive firms post wages. The model with heterogeneous contracts can achieve wage dispersion, labor share, employment transitions, and flow value of unemployment that are simultaneously consistent with empirical observations even when most firms post wages. Using German employee-level administrative data, I estimate roughly 70 percent of firms post wages and employ nearly 50 percent of workers under such contracts.
Dead-end and career jobs: skill specific earnings profiles with heterogeneous wage contracts
(full text) (updated June 25, 2014)
Abstract: I include differential skill levels on the part of workers in an on-the-job search equilibrium which features heterogeneous wage contracts. Firms choose between posting a non-negotiable contract or hiring under contingent pay which matches the value of a workers best-to-date outside offer. I give conditions under which the market decomposes into parallel skill-specific sub-markets in each of which a separating equilibrium arises where only low productivity firms offer non-negotiable contracts. Even when skill-specific sub-markets are ex-ante identical, differences arise ex-post. More skilled workers are more likely to receive negotiable wage offers. Consequently, high skilled workers experience lower rates of unemployment, more wage dispersion, and higher returns to experience than low skilled workers.
Empirical identification of the composition of contracts types using administrative data
Abstract: I provide details on how to estimate the share of renegotiable labor contracts in an on-the-job search equilibrium which features firm's choice between a wage posting and a sequential auction contract as in "Wage dispersion with heterogeneous wage contracts." Identification is achieved using administrative data on (only) worker's histories of job-to-job mobility and on-the-job pay gain. Methods are applicable to a broad set of data sources, making them ideal for cross-group, cross-country, and historical analysis.
Unemployment insurance and posted wage offers
Abstract: In the literature on optimal unemployment insurance it is common to assume that unemployment increases when in the generosity of unemployment insurance benefits increases. This assumption is substantiated in a model of labor search in which wage offers are drawn from an exogenous distribution. However, in a model where wage-posting firms maximize profits subject to workers' optimal strategy, it need not be the case that increasing benefits increases expected unemployment. Trade-offs can be substantially impacted by public policy that manipulates the dispersion of insurance benefits. I examine the efficiency of the design of unemployment insurance policy in the United States. Design can be described by policy changes which induce greater heterogeneity -- e.g. the statutory replacement rate -- and which decrease heterogeneity -- e.g. the maximum benefit cap. I give evidence that policy changes which reduce heterogeneity also reduce unemployment.