Research
Working Papers
Decomposing Duration Dependence in a Stopping Time Model
with Fernando Alvarez and Robert Shimer
Accepted for publication, Review of Economic Studies
[PDF, Online Appendix, September 2023]
NBER Working Paper No. 22188
We develop an economic model of transitions in and out of employment. Heterogeneous workers switch employment status when the net benefit from working, a Brownian motion with drift, hits optimally-chosen barriers. This implies that the duration of jobless spells for each worker has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers and prove that the distribution of inverse Gaussian distributions is partially identified from the duration of two completed spells for each worker. We estimate the model using Austrian social security data and find that dynamic selection is a critical source of duration dependence.
Consistent Evidence on Duration Dependence in Price Changes
with Fernando Alvarez and Robert Shimer
[PDF, July 2023]
R&R, The American Economic Review
NBER Working Paper No. 29112, CEPR Discussion Paper DP 16404
We develop a linear GMM estimator of the discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells. We find substantial unobserved heterogeneity with economically meaningful implications for the response of output to a monetary policy shock in a model with time-dependent pricing rules and for the degree of state dependence in a model of price plans.
High Wage Workers Work for High Wage Firms
with Robert Shimer
NBER Working Paper No. 24074
[PDF, February 2020]
We propose a new measure of the correlation between the types of matched workers and firms and show that this captures sorting in a variety of structural models. We also propose an estimator of the correlation and prove that the estimator is consistent when the number of workers and firms grows to infinity even if each worker only has a small number of jobs and each firm only employs a small number of workers. Model simulations also confirm that our estimator is accurate in small data sets. Using administrative data from Austria, we find that the correlation between worker and firm types lies between 0.4 and 0.6. In contrast, the Abowd, Kramarz, Margolis (1999) fixed effects estimator suggests no correlation in our data set. This reflects a combination of biases in the AKM correlation estimator and limitations of the AKM correlation as a measure of sorting.
Risk Premia and Unemployment Fluctuations
with Jaroslav Borovička
We study the role of fluctuations in discount rates for the joint dynamics of expected returns in the stock market and employment dynamics. We construct a non-parametric bound on the predictability and time-variation in conditional volatility of the firm's profit flow that must be met to rationalize the observed business-cycle fluctuations in vacancy-filling rates. A stochastic discount factor consistent with conditional moments of the risk-free rate and expected returns on risky assets alleviates the need for an excessively volatile model of the expected profit flow.
Peer Effects in College Application
with Angela Crema and Anusha Nath
This paper examines the effect of peers on high school students' decision of whether and where to apply for colleges. We use a rich administrative data from a large school district in Minnesota to identify peers based on detailed information about courses taken by students and random classroom assignments. We identify the effect of peers by using an instrumental variables strategy where we instrument the choices made by a student’s direct peers by the decisions made by the peers of their peers. We find that peers have a significant positive effect on a student’s probability of applying. Moreover, the average quality of one’s peers’ applications increases own application quality sizably and significantly. The effect is virtually zero for the lowest performing students, but it gets larger as own GPA raises. Peer effects seem to be at work within ability groups: High-performing students are mostly affected by their high-performing peers, whereas low-performing students respond more to the decisions of their low-performing peers.
Racial and Gender Differences in School-College-Career-Paths
with Anusha Nath
What determines the gender and racial gaps in initial wages of individuals just entering the labor market? Using Minnesota longitudinal data to examine the observed choices of individuals in high school, college, and the first job, we can quantify how much the differences in these observed choices contribute to the aggregate gender and racial gaps in initial wages. Knowing what choices are being made, and when, allows us to better understand the policy options for addressing these gaps.
Heterogeneous Job Ladders
with Claudia Macaluso
We use the universe of labor market histories for Austrian workers born in 1960-1962 to document how cross-sectional differences in career dynamics contribute to income inequality over the life cycle. In particular, we find that workers with different end-of-career earnings experience very different job-to-job mobility patterns, both in terms of frequency and employer type. Workers who are the bottom of the earnings distribution at the end of their work life, have higher employer-to-employer transition rates than richer workers. However, high rates of labor market mobility do not translate in an upward trajectory over time. In fact, poor workers work for worse- and worse-paying firms as they age, are more likely to undergo unemployment spells at all ages, and are significantly less likely to grow their wages early in their career, despite frequent job-to-job transitions. Therefore, poor workers experience a significant drop in average employer quality and stagnant average real wages over the life cycle. Workers who are at the top of the earnings distribution at career-end, instead, have the opposite labor market path. They change employer infrequently, but, when they do so, they tend to work for better- and better-paying firms. They have a steep wage-age profile, nurtured by a higher rate of wage increases in their early years (both following employer-to-employer transitions and while continuously employed at the same firm). We propose a structural framework with two-sided heterogeneity and human capital accumulation over the life cycle that matches these stylized facts. We use the calibrated model to draw conclusions on the importance of the initial match vis-a-vis climbing the job ladder for different worker types, and how different policy interventions would affect these two channels.
Job Flows, Worker Flows and Labor Market Policies
(previously circulated as What Drives Labor Market Flows?)
R&R, American Economic Review
[PDF, February 2016]
I study an equilibrium model of the labor market with firm- and worker-level shocks and evaluate the impact of labor market policies in this framework. Firms hire and shed workers in response to firm-specific productivity shocks. Workers and firms learn about the quality of their employment match and separate when they realize they are mismatched. Match quality and productivity shocks must interact in order to explain the hazard rates of separation in the cross section of firm growth rates and workers' tenures. The model is estimated using a large panel dataset of individual labor market histories in Austria. I find that accounting for worker flows generated by learning and direct job to job transitions, and job flows driven by firm-specific productivity shocks plays a crucial role for the evaluation of the impact of labor market policies on the unemployment rate, duration and average productivity.
The Accelerated Failure Time Model: Estimation and Testing using Price Change and Labor Market Data
with Fernando Alvarez and Robert Shimer
[slides, April 2016]
We use labor market data and data on price changes to examine the role of structural duration dependence and heterogeneity in shaping the aggregate hazard rates. In contrast to our companion paper "The Proportional Hazard Model: Estimation and Testing using Price Change and Labor Market Data," we examine this question through the lens of an accelerated failure time model, rather than a proportional hazard model. We focus on environments where we observe two observations per individual. We use a well-known lemma by Kotlarski (1967) to prove that the accelerated failure time model is non-parametrically identified. We also establish that the model is overidentified. In particular, we prove that the accelerated failure time model imposes restrictions on the characteristic function of the joint density of two spells. We examine this restriction and estimate the model using data on the timing of price changes and on the duration of employment and non-employment spells.
A Nonparametric Variance Decomposition Using Panel Data
with Fernando Alvarez and Robert Shimer
[PDF, September 2014]
We consider a population of individuals who draw a random variable from an individual-specific distribution that is fixed over time. We propose an unbiased within-between variance decomposition using a short panel of two observations for each individual. We illustrate the usefulness of our decomposition with two applications: decomposing heterogeneity versus structural duration dependence in unemployment, nonemployment, and employment durations; and calculating the importance of frictional wage dispersion for labor market outcomes.
Aggregation Across Time and Space of the Labor Market Flows
I present new empirical evidence on the relationship between job flows, worker flows, and the time horizon at which these flows are measured. In particular, I show that worker flows grow linearly with the horizon at which they are measured while job flows grow approximately with the square root of the horizon. These patterns hold for all firm size categories separately, and the magnitude of the job and worker flows decreases with employer's size. To interpret these patterns, I explore a model of a representative firm which responds to productivity shocks by adjusting its employment subject to an integer constraint on employment. When the productivity process follows a Brownian motion, the model generates the observed relationship between the flows and the horizon at which they are measured. The integer constraint on employment explains why the flows rise with the employer size, even if these employers face the same productivity shocks. Finally, I discuss the implications of the presented facts for interpreting the differences in the characteristics of the labor markets in Europe and the U.S.