Research

Working Papers

Job Market Paper - Heterogeneous Agents, Public Debt, and Labor-Market Frictions (with Vitor Fancio)

This paper studies the impact of public debt on vacancy creation, wages, and welfare using a search-and-matching model with ex-ante heterogeneous agent in an incomplete markets framework. The trade-off between the opportunity cost of smoothing consumption and firms' incentive to post vacancies for different agents shapes the public debt choice. We calibrate a general equilibrium model to match the key moments concerning unemployment, wealth and wage distributions, and the share of public debt to the United States. First, we show that a substantial public debt hike, from 0% to 300%, has a twofold effect on labor-market outcomes. Via bilateral wage bargaining, wages decrease by almost 11% while the unemployment rate increases by 0.4 percentage points due to the effect of capital reduction on firms' vacancy posting decisions. In consonance with our reduced-form exercises, unemployment rates increase more for less-educated individuals than for educated ones. Furthermore, our model demonstrates that bilateral wage bargaining plays a pivotal role in accommodating the increase in public debt, overshadowing the response of unemployment, thereby mitigating firms' willingness to post vacancies. Interestingly, we find that this economy's optimal level of public debt equals 0, driven by conflicting interests among different educational groups. However, when public debt is utilized to finance an unemployment insurance program, the optimal level of public debt shifts to a positive value.

Presented: T2M (Paris), Asian Meeting Econometric Society (China), Encontro Brasileiro de Economia (2023)

Unemployment Insurance, Informality, and Precautionary Savings (with Marcelo Santos)

Reject and Resubmit at Review of Economic Dynamics

Empirical evidence shows that in a labor market characterized by a severe degree of informality, unemployment insurance (UI) has different effects that most of the literature, based on developed countries, address. First, UI takers are incentivized to work in the informal sector while collecting benefits. Second, UI distorts the precautionary savings motive, affecting the worker decision and firms' incentives to post vacancies. Considering those facts, we build a search and matching model that incorporates informality in an incomplete markets framework to analyze the impact of changing (UI) components. In particular, we consider a UI design that allows eligibility and exhaustion. Moreover, we also enable workers to receive benefits while working in informality. We find that increasing the benefit eligibility criteria fosters employment while the duration and replacement rate barely affects the unemployment rate. On the other hand, the benefit duration is the key component to understanding the interaction between informality and UI. We also find that the optimal design occurs when more insurance is provided in this economy, away from the literature of UI with search frictions and incomplete markets. The welfare rises 0.32% because of the indirect effect of UI on informal wages through precautionary savings. However, when we allow every worker to collect the benefit, we find the opposite, with solid support to shut down the benefit due to the harm caused on vacancy posting of formal firms, which increases unemployment.

Presented: African, China, European Winter, Latin America Meetings of Econometric Society, EALE 2021, 1st ASPEC and UofT Macroeconomics Brown Bag, Encontro Brasileiro de Economia, 2022

Work in Progress

Firms Determinants on Wage Growth

I run a two-way fixed effects model to see the role of person and, especially, firms fixed effects in the wage growth determination. I rely on a unique dataset from Brazil RAIS, which allows us to identify employee-employer for all formal jobs and firms in São Paulo, the largest state of Brazil. I find that, in general, firm's fixed-effects start to be decisive to earnings growth only above the 25th percentile. I also see a flat pattern in age, indicating that when individuals get older, their earnings growth starts to be lower than younger individuals. When the analysis is segmented by level of education, I find that individuals with lower than high school (LHS) show an earnings growth only above the 50th firm percentile and below individuals with high school (HS). Still, surprisingly, high-school individuals show an earnings growth higher than those above high school (AHS). The same age-flat pattern occurs when I segment individuals by educational level.

Severance Payments, Incomplete Markets and Labor Frictions with Informality (with Rafael Rocha de Azevedo)

This paper analyzes the effect of severance payments in welfare and job formalization using a rich model with imperfect insurance against idiosyncratic shocks, risk-averse agents, and search-matching frictions in formal and informal sectors. A key feature of our model is that firms partially avoid the costs related to the program through efficient worker-firm bargains, affecting formal job creation decisions and steepening the wage profile. We estimate the model to be consistent with the Brazilian experience, a country with an extensive severance payments system known as FGTS. The calibrated model allows us to conduct counterfactual exercises by removing the program. We find that the reform raises job formalization by more than three percentage points. Moreover, since firms do not tilt wages downwards to compensate for severance payments costs, the consumption path becomes smoother. As a consequence, abolishing severance payments produce significant welfare gains

Paying Students to Graduate from High School: Aggregate and Distributive Consequences (with Leonardo Siqueira, Vitor Fancio and Marcelo Santos)

This paper examines the aggregate and distributional effects of government-financed Conditional Cash Transfer (CCT) programs designed to reduce high school dropout rates. We develop a general equilibrium life-cycle model with incomplete markets, endogenous education decisions, and labor market frictions, calibrated to match key empirical moments of the Brazilian economy. Our findings reveal that educational transfers targeted at low-income high school students not only reduce dropout rates significantly but also generate substantial macroeconomic gains. Specifically, these policies result in a 33.2\% reduction in the share of the labor force with only primary education, while increasing high school and college graduation rates by 15.2% and 33.9%, respectively. These improvements in human capital drive a 12% increase in output and reduce unemployment by 0.3 percentage points, from 7.8% to 7.5%. Moreover, wage disparities across education levels narrow, leading to a 3.3\% decline in the Gini coefficient, thereby reducing income inequality. These results highlight the broader potential of CCT programs as an effective policy tool for mitigating educational disparities and fostering inclusive economic growth in developing economies.

Page updated

Google Sites

Report abuse