Research

Working Papers

Wage Rigidity and Employment Outcomes: Evidence from Administrative Data, with Gabriel Ehrlich

Abstract: This paper examines the relationship between downward nominal wage rigidity and employment outcomes using a novel linked employer-employee dataset from Germany. The estimates suggest wage rigidity prevents 27.1 percent of counterfactual wage cuts, with a standard deviation of 19.2 percent across establishments. An establishment with the sample-average level of wage rigidity is predicted to have a 4.2 percentage point higher layoff rate, a 6.4 percentage point lower quit rate, and a 2.0 percentage point lower hire rate. Estimating a structural model by indirect inference implies that the average cost of a nominal wage cut is 9,000 euros, 30 percent of an average worker’s annual compensation.

Are Entry Wages Really (Nominally) Flexible?, with Gabriel Ehrlich and Matthew Hall

Abstract: No, entry wages simply appear flexible because of composition bias. We show that although the wages of job finders are more elastic with respect to the business cycle than the wages of job stayers, both types of workers show substantial downward nominal wage rigidity as measured in aggregate wage change histograms. We reconcile this apparent contradiction in a model in which employed and unemployed workers both face Calvo-style downward nominal wage rigidity. Unemployed workers with flexible reservation wages are more likely to become re-employed than those with rigid reservation wages, so they are over-sampled in the observed wages of job finders. The estimated model reproduces the stylized fact that the observed wages of job finders are substantially more elastic with respect to the business cycle than the wages of job stayers, although the estimated (unobserved) reservation wages of unemployed workers are nearly as rigid as the wages of employed workers. Therefore, the standard wage elasticity regressions used in the literature are likely unreliable and will generate large wage elasticities for new hires even when the underlying reservation wages of all unemployed workers are substantially rigid. Thus, the large observed wage elasticities of job finders do not preclude downward nominal wage rigidity from playing an important role in determining the cyclical movements in unemployment.

Winners and Losers of Financial Crises: Evidence from Individuals and Firms, with Daniela Hochfellner, Martin Schmalz, and Denis Sosyura

Abstract: We use a comprehensive employer-employee dataset from German social security records and commercial bank data to examine the impact of an exogenous shock to bank capital on individual workers' careers. German regional banks' trading losses from exposure to U.S. mortgage-backed securities cause a large contraction in the supply of capital to private firms in banks' exclusive geographic domains. We find that workers in affected establishments suffer persistent earnings losses of over €1,500 per year and experience three more weeks in unemployment than workers employed in unaffected establishments. Affected establishments limit the layoffs but cut hiring, especially into vocational training programs. Employees who are most negatively affected by the shocks include the unskilled, less educated, and less experienced workers with shorter tenures.

CBO's Projection of Labor Force Participation Rates

Abstract: This paper examines the factors behind the recent trend decline in the overall and prime-age labor force participation rates and whether those declines are likely persist over the next decade. Persistent weakness in the labor market following the 2007–2009 recession reduced the overall labor force participation rate by as much as 1.2 percentage points and the prime-age rate by as much as 1.3 percentage points. A strengthening labor market has pulled some workers back into the labor force in recent years, and further cyclical increases are estimated to occur in both the overall and prime-age rates over the next few years. The estimates show, though, that the vast majority of the recent decline in the overall rate stems from the aging of the baby-boom generation into retirement, and and aging is likely to cause further declines in that rate over the next 10 years. The recent decline in the prime-age rate is entirely unrelated to aging, and downward trend is expected to slow over the next decade, as increases in educational attainment outstrip further declines in the participation rates of less educated, prime-age individuals.

Work in Progress

“The Financial Channel of Wage Rigidity: Evidence from Firm and Worker Administrative Data” with Gabriel Ehrlich, Daniela Hochfellner, and Owen Nie

"Aging Workforces and Productivity: Evidence from Matched Employer-Employee Data"

"Labor Market Prospects for the Long-Term Unemployed" with Jason Sockin

CBO Policy Work

"Factors Affecting the Labor Force Participation of People Ages 25 to 54" with David Burk (February 2018)

"CBO's Labor Market Projections: 2017 and 2018" (February 2017)

"CBO's Long-Term Projections of Labor Force Participation" with Xiaotong Niu and Julie Topoleski (January 2017)

“The Budget and Economic Outlook,” January 2015 (pp. 38-45, 50, 55), January 2016 (pp. 42-47, 52, 58-59), January 2017 (pp. 42-43, 51-52, 59, 66, 69)

“An Update to the Budget and Economic Outlook,” August 2015 (pp. 41-47, 52, 57), August 2016 (pp. 45-50, 54, 62), June 2017 (pp. 8-12)

“The Long-Term Budget Outlook," July 2016 (pp.78-80), March 2017 (pp. 33-34)