Research

Monopsony power is often measured by interpreting firm wage and labor responses to shocks through static models. But when workers face frictions to changing jobs, employment adjusts gradually, and workers respond to changes in the total value of a job–––not just the current wage. We develop a general equilibrium dynamic monopsony model where firms contract with risk-averse workers over idiosyncratic shocks. This allows us to model the shock-identified labor supply elasticity that is often estimated empirically and understand its implications for the extent of monopsony power. The shock-identified labor supply elasticity depends on the persistence of the shock, worker risk aversion, and the horizon over which it is estimated. These forces induce a wedge between the inverse shock-identified labor supply elasticity and the wage markdown. We estimate the model using U.S. Census employer-employee matched data. The small and persistent wage response to temporary shocks is consistent with firms insuring risk-averse workers. Search frictions explain why employment continues to rise even after wages have started to fall. We find the average worker's wage is marked down 8.3%. By contrast, the static model approach of inverting the shock-identified labor supply elasticity implies a markdown estimate as wide as 26%. Lastly, we show that firm employment dynamics are not efficient: insurance distorts the job ladder, preventing productivity-improving job transitions from occurring.

Job loss is one of the most costly economic risks workers face, but a firm’s layoff risk is difficult to observe. We document substantial, persistent variation in firm layoff rates, creating scope for workers to change their job loss risk through firm choice. We exploit linked survey, experimental, and administrative data from Austria to examine how unemployed workers perceive and respond to information about firm-level layoff risk. Workers believe that past layoffs are predictive of future risk and prefer jobs at firms with lower historical layoff rates, but have significant misperceptions about which firms are safer. Providing workers with information about firm layoff histories causes them to redirect their search toward historically safer employers. Using a search and matching model, we show that imperfect information distorts equilibrium outcomes: it reverses the compensating differential for layoff risk and raises the average layoff rate by allocating more workers to high-risk firms.

abstract approved for distribution; draft under IRS review for distribution

We study the tipped minimum wage and the minimum wage using US tax data. Leveraging state policy changes, we show that the tipped minimum wage increases base wages of tipped workers, but decreases tips, at least fully offsetting any increase in earnings. By contrast, the minimum wage causes earnings of tipped workers to increase mostly through tips. Changes in tips are driven primarily by changes in the percentage of revenue tipped rather than changes in revenue per worker or tip pooling. Changes in tips are similar for workers throughout the firm wage distribution, suggesting firm-level policies matter for tip rates. We find negative effects of the tipped minimum wage on employment and revenue. A monopsony model where tips and wages are imperfect substitutes to the firm can rationalize these results.

Approved U.S. Census project