Working Papers

joint with Mark Bils and Yongsung Chang
March, 2018

We consider a matching model of employment with flexible wages for new hires, but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort's response can greatly increase wage inertia. 

joint with Yongsung Chang, Kyooho Kwon and Richard Rogerson
July, 2014
We develop a heterogeneous-agent general equilibrium model that incorporates both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins. We consider calibrated versions of this model that differ in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the key features of the empirical hours worked distribution, including how individuals transit within this distribution. We then study how the various specifications influence labor supply responses to temporary shocks and permanent tax changes, with a particular focus on the intensive and extensive margin elasticities in response to these changes. We find important interactions between heterogeneity and the extent of curvature in preferences.
joint with Bo Hyun Chang and Yongsung Chang
Review of Economic Dynamics, forthcoming

We develop a quantitative, heterogeneous-agents general equilibrium model that reproduces the income inequalities of 32 countries in the Organization for Economic Co-operation and Development. Using this model, we compute the optimal income tax progressivity and redistribution for each country under the equal-weight utilitarian social welfare function. A policy reform to adopt the optimal progressivity is supported by the majority of the population. Finally, we uncover the Pareto weights in the social welfare functions of each country that justify the current redistribution policy. 

joint with Yongsung Chang
Global Economic Review, Volume 45, Issue 3, 2016, pp. 275-293.
At the aggregate level, the labor supply elasticity can significantly depart from the micro elasticity. In an economy where households make decisions on the labor market participation, the slope of the aggregate labor supply curve is determined by the distribution of reservation wages rather than by the willingness to substitute leisure intertemporally. We present a model economy where earnings and wealth distributions are comparable to those in the micro data. We find that the aggregate labor supply elasticity of such an economy is around 1, which is greater than the typical micro estimates but smaller than those often assumed in the aggregate models. Our model also sheds some light on the recent debate on the failure of the representative agent model.

Review of Economic Dynamics, Volume 16, Issue 3, 2013, pp. 477-496.
We undertake a quantitative analysis of the global dispersion of current accounts, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model accounts for nearly all of the global dispersion of current accounts. The model also implies that the easing of financial frictions can account for the historical increase in the current account dispersion.

joint with Yongsung Chang and Frank Schorfeide
Journal of the European Economic Association, 11 (S1), 2013, pp. 193-220. Online Appendix
Data from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative-agent model is estimated. Preference and technology parameter estimates of the representative-agent model are not invariant to policy changes and the bias in the representative-agent model's policy predictions is large compared to predictive intervals that reflect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes.
joint with Mark Bils and Yongsung Chang
Journal of Monetary Economics, Volume 59, Issue 2, 2012, pp. 15-165.

Worker heterogeneity in productivity and labor supply is introduced into a matching model. Workers who earn high wages and work high hours are identifed as those with strong market comparative advantage---high rents from being employed. The model is calibrated to match separation, job finding, and employment in the SIPP data. The model predicts a big drop in employment for workers with weak comparative advantage during recessions. But the data show that workers with strong comparative advantage also display sizable employment fluctuations, implying that aggregate employment fluctuations are not explained by the responses of workers with small rents to employment.
joint with Yongsung Chang
The B.E. Journal of Macroeconomics: Volume 11, Issue 1 (Contributions), 2011, Article 42. 
Using a standard incomplete-markets model, we compute the welfare of two socioeconomic systems: laissez-faire and egalitarianism. The egalitarian system (in which after-tax wages are compressed) provides insurance against income risks but at the cost of inefficiency: it undermines productive workers’ incentives to work. When the stochastic process of idiosyncratic productivity shocks are calibrated to match the earnings inequality, the egalitarian society yields a much higher welfare as the insurance benefit dominates the efficiency loss. However, when the idiosyncratic productivity shocks are calibrated to capture the ex-post heterogeneity of earnings only, households are better off under laissez-faire if the labor supply is elastic enough. Transition between the two regimes is computed. When the wage compression is removed from the egalitarian steady state, the inequality emerges quickly and reaches its laissez-faire steady state in 20 years.
joint with Yongsung Chang, Kyooho Kwon and Richard Rogerson
American Economic Review: Papers and Proceedings 2011, 101:3, pp. 476-481
We construct a family model of labor supply that features adjustment along both the intensive and extensive margin. Intensive margin adjsutment is restricted to two values: full time work and part-time work. Using simulated data from the steady state of the calibrated model, we examine whether standard labor supply regressions can uncover the true value of the intertemporal elasticity of labor supply parameter. We find positive estimated elasticities that are larger for women and that are highly significant, but they bear virtually no relationship to the underlying preference parameters.
Worker Heterogeneity and Endogeneous Separations in a Matching Model of Unemployment Fluctuations
joint with Mark Bils and Yongsung Chang
American Economic Journal: Macroeconomics, 3(1), 2011, pp. 128-154.
We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off---it cannot produce both realistic
dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment.
Cyclicality of Wages, Separations and Unemployment
The Korean Journal of Economics, 17(1), 2010.
We introduce worker differences in labor supply, reflecting difference assets, into a model of separations, matching, and unemployment over the business cycle. Separating from employment when unemployment duration is long is particularly costly for workers with high labor supply. This provides a rich set of testable predictions across workers: those with higher labor supply, say due to lower assets, should display more procyclical wages and less countercyclical separations. Consequently, the model predicts that the pool of unemployed will sort toward workers with lower labor supply in a downturn. Because these workers generate lower rents to employers, this discourages vacancy creation and exacerbates the cyclicality of unemployment and unemployment durations. In SIPP data, we find that wages are much more procyclical while separations from employment are much less cyclical for those who work more. We see a strong compositional shift during recessions among the unemployed toward workers who typically work less.
Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy?
joint with Sungbae An and Yongsung Chang
American Economic Journal: Macroeconomics, 1(2), 2009, pp. 29-54.
Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a non-concave or unstable utility as is often found with the aggregate U.S. data. 
Unemployment Insurance Policy with Endogenous Labor Force Participation
Journal of Economic Theory and Econometrics, 19(4), 2008, pp. 1-36.

We construct a variant of the Mortensen--Pissarides matching model in which a worker's labor force participation decision is endogenous. The distinction between unemployment and nonparticipation, two non-working states, is due to a worker's job search behavior. A key feature of the model is that heterogeneity in productivity is introduced in order to characterize a worker's endogenous search intensity choice. A distinguishing result from the quantitative experiment of the unemployment insurance (UI) policy is that an increase in UI benefits has a significant impact on the labor force size as well as on the composition of the labor force, which crucially depends on the authority's ability to monitor the moral hazard. With perfect monitoring, more generous UI benefits increase both the ratios of employment and unemployment to population. In the absence of monitoring, we find the opposite results.



joint with Yongsung Chang
Hankuk Gaebal Yeongu (in Korean), December, 2008.
This paper considers a heterogeneous agent dynamic general equilibrium model and analyzes effects of an increase in labor income tax rate on labor market and the aggregate variables in Korea. The fiscal policy regarding how the government uses the additional tax revenue may take the two forms: 1) general transfer and 2) earned income tax credit (EITC). The model features are as follows: 1) Workers are heterogeneous in their productivity. 2)Labor is indivisible, hence the analysis focuses on the variation in labor supply through the extensive margin in response to a change in fiscal policy. 3) The incomplete markets are introduced, so individual workers can not perfectly insure themselves against risks related to stochastic changes in income or employment status. 4) The model is of general equilibrium, hence it is equiped to analyze the feedback effect
of changes in aggregate variables on individual workers' decisions. In the case of general transfer policy, the government equally distributes the additional tax revenue to all workers regardless of their employment states. Under this policy, an increase in the labor income tax rate dampens work incentives of individual workers so that the aggregate employment rate decreases by 1% compared with the benchmark economy. In the case of EITC policy, only employed workers whose labor incomes are below a certain EITC ceiling are eligible for the EITC benefits. Unlike the general transfer policy, the EITC induces low-income workers to participate the labor market to be eligible for EITC benefits. Hence, the aggregate employment rate may increase by 2.7% at the maximum. As the EITC ceiling increases, too many workers can collect the EITC but the benefits per worker becomes too little so that the increase in employment rate is negligible. By and large, this study demonstrates that EITC may effectively raise the aggregate employment rate, and that it can be a useful policy tool in response to the decrease in the labor force due to population aging as observed in Korea recently.
Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations
joint with Yongsung Chang
American Economic Review, 97(5), 2007, pp. 1939-1956.

We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles.


At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate.

On the Aggregate Labor Supply
joint with Yongsung Chang
Economic Quarterly, 91(1), 2005. pp. 21-37.
The labor supply elasticity of an individual household and the aggregate labor supply elasticity of all households can differ significantly. If individual households not only decide on their hours worked, but also on whether to work or not, then the aggregate labor supply is determined not only by the willingness to substitute leisure over time, but also by the distribution of reservation wages. We present a model economy where earnings and wealth distributions are comparable to those in the micro data. We find that the aggregate labor supply elasticity of such an economy is around 1 which is greater than the typical micro estimates but smaller than those often assumed in the aggregate models.
Employment and the Sexual and Reproductive Behavior of Female Adolescents
joint with Lauren Rich
Perspectives on Sexual and Reproductive Health, Vol 34, No. 3, 2002.
Patterns of Later Life Education among Teenage Mothers
joint with Lauren Rich
Gender and Society, Vol. 13, No. 6, 1999.
The Estimates of Human Capital in Korea, 1963--1993
joint with Jong-Wha Lee
Korea Social Science Journal, 23, 1997.