Research

Working Papers

Expanding the Labor Market Lens: Two New Eurozone Labor Indicators with Ece Fisgin, Alex Haag,  and Mitch Lott (new draft August2025)

Abstract:  We present a principal component analysis of euro area labor market conditions by combining information from 22 labor market indicators into two comprehensive series. These two novel indicators provide a systematic view of the current state and forward-looking direction of the euro-area labor market, respectively, and demonstrate superior forecasting performance compared to existing indicators. Crucially, we find significant implications for monetary policy design: a local projection analysis reveals that ECB monetary policy shocks have attenuated effects on both inflation and unemployment when the labor market forward-looking indicator is high. The dampened inflation response calls for tighter policy rate paths than a standard Taylor rule would prescribe. Finally, we show that focusing solely on the official unemployment rate may understate the actual labor market slack, and consequently, the trade-off between labor market health and inflationary dynamics. 

Working paper version: International Finance Discussion Papers 2025-1415

 Self-Employment Promotion as Active Labor Market Policy: Design and Trade-offs in Rigid Labor Markets with Rocio Madera  and Zoe Xie (accepted for publication at Economic Letters)

Abstract: This paper analyzes self-employment subsidies for the unemployed, a common policy in Europe. We develop a search model with self-employment to study how startup funding affects individual choices, employment, and welfare. The model identifies three channels: (1) direct unemployment reduction, (2) crowding-out effect on paid employment, and (3) budget effect, whereby startup subsidies can generate fiscal savings if unemployment falls sufficiently. (1) and (3) are increasing with labor market rigidity. A simple calibration quantifies these channels and compares welfare effects across labor market structures. Our findings inform active labor policy design in the presence of generous unemployment insurance and rigidities.

The Labor Market Effects of Employment Flexibility (new draft April 2025, previously circulated as "The Macroeconomic Effects of Employment Protection on Human Capital and Jobs")

Abstract: This paper studies the effects of firing cost differences across jobs on workers' human capital and employment. Using Spanish administrative data, I document that the scarring effect of unemployment on earnings and wages is larger for separated workers re-employed in lower-firing-cost jobs. To rationalize this, I propose a quantitative model where firms offer contracts that differ in the level of protection in terms of firing costs they encompass and in the human capital accumulation they provide. The estimated model is consistent with a larger scar for workers re-employed under lower firing-cost jobs because of slower human capital accumulation while employed and frequent depreciation during unemployment from increased turnover. I quantify that entering the labor market with a job with lower firing costs results in an 18 percent lifetime wage loss, and that increasing labor flexibility via low firing cost jobs results in reduced aggregate productivity.

The drag of homeownership on the unemployment scar with Eva de Francisco (new draft February 2025)

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

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

Does Self-Employment Pay? The Role of Unemployment and Earnings Risk with Rocio Madera (Oxford Bulletin of Economics and Statistics, October 2024)

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.

Working paper version: International Finance Discussion Papers 2019-1264

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

An investigation into the economic slowdown in the euro area with Francois de Soyres,  Ece Fisgin, Mitch Lott, Chris Machol and Keith Richards (December 2024)

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