NEW: Declining Search Frictions, Unemployment, and Growth Revisited (with Juan Carlos Cordoba and Haoran Li)
Abstract
This paper revisits the conditions under which search models deliver balanced growth paths (BGPs)---equilibria in which unemployment, vacancies, and job flows remain stable despite declining search frictions. Martellini and Menzio (2020) argue that such paths exists if and only if matches are "inspection goods" and match quality follows a Pareto distribution. We show that their conditions are sufficient but not necessary, and that they imply counterfactual predictions: unemployment persists even when vacancy posting is costless, and welfare gains from eliminating search frictions are infinite. We develop two alternatives. First, with exponential sampling, the economy admits a generalized balanced growth path where labor market variables remain stationary, unemployment vanishes as posting costs fall, and declining frictions do not generate long-run growth. Second, when technological progress is biased in the matching function, vacancies and unemployed workers are complementary inputs, and technological progress is worker-augmenting, the economy converges to a BGP with finite welfare gains and vanishing unemployment---though the equilibrium is necessarily inefficient. Together, these results clarify the limits of inspection models and provide a more robust Diamond-Mortensen-Pissarides-based framework for understanding the role of declining search frictions.
"Endogenous Bargaining Power and Declining Labor Compensation Share" (with Juan Carlos Cordoba & Haoran Li) (Submitted)
Abstract
We show that the protracted long-run decline in the labor share positively correlates with a long-run decline in the tightness rate, defined as the ratio of vacancies to job seekers. We provide an explanation for this regularity. If vacancies and job seekers are complements in the matching process, a reduction in the tightness rate weakens workers’ fundamental bargaining power, thereby lowering the labor share of income. Using a calibrated search-and-matching model with endogenous bargaining power, we estimate that workers’ bargaining power fell by 8–13% from 1980 to 2007, accounting for 18–45% of the labor share's decline.
"Are Earnings Inequality and Firm Concentration Connected? Evidence from an Assignment Model" (Submitted)
[Paper]
Abstract
This paper develops a unified theoretical and quantitative framework to explain two major economic trends: the rise in earnings inequality and the growing firm concentration. Using a general equilibrium assignment model with hierarchical firms and monopolistic competition, I uncover a novel result: firm concentration can increase even as productivity dispersion declines, driven by organizational flattening and increasing skill dispersion. Calibrated to U.S. data from the 1980s and 2010s, the model replicates the rise in both wage and firm size inequality and matches untargeted distributional moments. Counterfactual decompositions show that flatter hierarchies—not widening productivity gaps—account for most of the observed increase in employment concentration. These findings challenge conventional superstar firm narratives and suggest that labor and organizational changes, not productivity divergence, are central to understanding concentration dynamics.
"Equilibrium Unemployment: The Role of Discrimination" (with Juan Carlos Cordoba & Haoran Li) (Previously circulated under the title "Demographic Labor Market Accounting")
Finance and Economics Discussion Series 2021-080. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2021.080.
Abstract
U.S. labor markets are increasingly diverse and persistently unequal between genders, races and ethnicities, skill levels, and age groups. We use a structural model to decompose the observed differences in labor market outcomes across demographic groups in terms of underlying wedges in fundamentals. Of particular interest is the potential role of discrimination, either taste-based or statistical. Our model is a version of the Diamond-Mortensen-Pissarides model extended to include a life cycle, learning by doing, a nonparticipation state, and informational frictions. The model exhibits group-specific wedges in initial human capital, returns to experience, matching efficiencies, and job separation rates. We use the model to reverse engineer group-specific wedges that we then feed back into the model to assess the fraction of various disparities they account for. Applying this methodology to 1998–2018 U.S. data, we show that differences in initial human capital, returns to experience, and job separation rates account for most of the demographic disparities; wedges in matching efficiencies play a secondary role. Our results suggest a minor aggregate impact of taste-based discrimination in hiring and an important role for statistical discrimination affecting particularly female groups and Black males. Our approach is macro, structural, unified, and comprehensive.
"Understanding Life-Cycle Gender Gaps in Labor Market Outcomes: A Search and Matching Approach"
Abstract
This paper decomposes the sources of the life-cycle gender wage gap according to a calibrated version of the Mortensen and Pissarides (1994) search and matching model augmented to include life-cycle features and endogenous accumulation of human capital due to experience and aging. In the model, workers can be employed, unemployed, or nonparticipating. Female and male workers differ with their productivity, bargaining power, and transition probabilities between labor market states. As human capital of a worker increases along with wages whenever a worker is employed, career breaks are costly in terms of lost human capital. I calibrate the model using U.S. labor market data to study the quantitative effects of these gender differences on the life-cycle wage gap. The joint determination of employment, unemployment, and wages in the general equilibrium imposes structure on identification of the model parameters. I find that the model can create the two stylized facts observed in the data - the gender wage gap starts narrow and increases over the life cycle. Majority of the gap, 55 percent, and majority of the growth in the wage gap over lifetime can be explained by the differences in labor market attachment between gender measured by the transition probabilities, supporting empirical evidence that career breaks are costly in terms of the lost wages. Females' lower bargaining power explains 2 percent of the gap, while exogenous gender differences in productivity are important in generating the wage gap in the outset of careers and can explain 43 percent of the total gap.
Inequality and Bank Funding Structure (with Sam Jerow)
Life-Cycle Labor Flows Over the Last Five Decades (with Emily Pedace)
Inequality and Financial Sector Vulnerabilities (with Sam Jerow). FEDS Notes. Washington: Board of Governors of the Federal Reserve System, April 19, 2024, https://doi.org/10.17016/2380-7172.3482.