Research

Working Papers

Does Self-Employment Pay? The Role of Unemployment and Earnings Risk with Rocio Madera (forthcoming at Oxford Bulletin of Economics and Statistics)

Abstract: This paper studies the role of earnings risk in reconciling the observed lower earnings returns in self-employment. Using Spanish administrative data, we characterize the distribution and dynamics of earnings and document lower and less dispersed earnings in self-employment. We consider alternative hypotheses and highlight the role of lower unemployment risk in self-employment. We decompose earnings risk dynamics by estimating a life-cycle earnings process. Indeed, the self-employed experience lower returns but face lower volatility and persistence of shocks. Our results rule out theories in favor of experimentation and earnings growth in self-employment, and highlight the trade-off between earnings and unemployment risk.

 Other versions: International Finance Discussion Papers 2019-1264

The drag of homeownership on the unemployment scar with Eva de Francisco (new draft March 2024)

Abstract:  We document that homeowners suffer larger and more persistent earnings losses than renters, and losses increase on home equity availability and decrease on housing payments. To rationalize our findings, we build an island search model of the labor market, where human capital dynamics depend on workers’ job status. Workers value both nondurable consumption and housing services. Owning a house provides higher housing services than renting it and increases available collateral, but homeownership requires an initial down payment and is subject to selling costs. The calibrated model recreates the larger “unemployment scar” for homeowners through different channels: an initial higher fall off the job ladder due to human capital decay while unemployed, an intensive use of home equity to smooth consumption, a pickier attitude toward reemployment, and lower migration to better job markets.

Non-technical FEDS note (with Eva de Francisco and Tyler Powell) here

The Macroeconomic Effects of Employment Protection on Human Capital and Jobs (new draft coming soon!)

Abstract: European labor markets are characterized by the stringencies of their employment protection legislation. I study the impact of these regulations on human capital accumulation, cyclicality of job creation, and sorting of workers across contracts. I propose a quantitative model with contracts that differ in the level of protection they offer and provide human capital human capital accumulation, where ex-ante identical workers are offered different contracts as the result of imperfectly observed match quality. I estimate the model with Spanish Social Security Data and study the effects of firing costs on human capital accumulation. I find that  workers with protected jobs accumulate human capital faster compared to fixed-term workers and that a quarter of unemployment erodes 4.5 percent of workers' human capital, leading to an average 1.6 percent wage loss. Lower human capital accumulation and more frequent unemployment spells under fixed-term contracts generate lead to persistent unemployment scars after a job loss. I estimate the cost of entering the labor market to be 10 percent of the present discounted value of the first 10 years of wages, compared to entering during an expansion.

Countercyclical labor productivity and two-tier labor markets (updated September 2017)   

Abstract: The correlation between productivity and employment is negative in southern European countries, which cannot be reconciled by most existing models. These countries have two-tier labor markets: highly protected permanent workers exist alongside workers with insecure temporary contracts. The goal of this project is to quantitatively assess the connection between two-tier labor markets and the observed negative correlation. I propose a theoretical model of the labor market to test the effects of two-tier labor markets on aggregate productivity and employment and I show that the model is able to generate the negative correlation observed in the data.

Publications

Sectoral Shocks, Reallocation, and Labor Market Policies with Anna Lipinska and Gaston Navarro  

European Economic Review, Volume 156, July 2023

Abstract: Unemployment insurance and wage subsidies are key tools to support labor markets in recessions. We develop a multi-sector search and matching model to study labor-market policies responses to sector-specific shocks. Our calibration accounts for labor market structural differences between the United States and the euro area, including a lower job-finding rate in the latter. We use the model to evaluate unemployment insurance and wage subsidy policies in recessions of different duration. We find that, after a temporary sector-specific shock, unemployment insurance improves both productivity and reallocation toward productive sectors, at the cost of initially higher unemployment and thus human capital destruction. In the United States, unemployment insurance is preferred to wage subsidies when it does not distort job creation for too long. By contrast, wage subsidies reduce unemployment and preserve human capital, at the cost of limiting reallocation. In the euro area, where job-finding rate is lower, subsidies are preferred.

Other versions: International Finance Discussion Papers 2022-1361, BIS Working papers No. 1095

Liquidity funding shocks: the role of banks' funding mix  with A. Alvarez, A. Fernandez and D. Posada

Journal of Financial Services Research, June 2019, Volume 55, Issue 2–3, pp 167–190

Abstract: This study attempts to evaluate the impact of an increase in banks’ funding stress and its transmission to the real economy taking into account different funding sources banks can rely on. Using aggregate financial data from Euro Area financial systems, we find that following a liquidity funding shock, both credit and GDP decline in different size and length. The impact on GDP tends to revert faster whereas in the case of credit the effect turns out to be more persistent. In particular, periphery countries experience a more pronounced fall in credit growth and the negative effects from the shock last longer than in core countries. The composition of banks’ funding seems to play a relevant role as periphery countries rely more on wholesale funding during normal times.

Working paper version: International Finance Discussion Papers, 2019-1245

Policy notes

Why is the U.S. GDP recovering faster than other advanced economies? with Francois de Soyres, Nils Gornemann, Sharon Jeon, Grace Lofstrom and Dylan Moore (May 2024)

Stuck at home? The drag of homeownership on earnings after job separation. with Eva de Francisco and Tyler Powell (November 2020)

Work in Progress

Self-employment as an Active Labor Market Policy: a Quantitative Evaluation using UI Capitalizations with Rocio Madera and Zoe Xie