Research

Working Papers

When labor rigidities meet financial constraints: Evidence from Italy (Job Market Paper)

Abstract: This paper explores the role of rising unit labor costs, tied to nationally set contractual wage floors, in depressing the Italian manufacturing sector. Using firm-level panel data, I document a negative relationship between sectoral wage floor growth and firm-level investment, employment, and sales. This relationship is highly heterogeneous and suggests a role for financial frictions: Small, highly leveraged firms experience contractions three times larger than those of large, low-leverage firms. To understand the mechanisms behind this and quantify aggregate effects, I develop a model where overlapping generations of heterogeneous firms face both collateral constraints and industry-wide wage floors. Calibrated to the 25 percent unit labor cost increase incurred by the Italian manufacturing sector from 1999 to 2015, the model predicts aggregate contractions in manufacturing investment (3.5 percent), employment (2.1 percent), and real GDP (1.9 percent). A decomposition reveals that financial frictions amplify the direct effects of wage rigidity by approximately 30 percent through an interaction effect. The results highlight how labor market institutions and financial frictions can interact to generate persistent effects on firm dynamics and aggregate performance.

Labor mobility and the level of unemployment in a currency union, (with Christopher L. House, Christian Proebsting, and Linda L. Tesar). 

Abstract: Unemployment rates are substantially higher and more volatile in the euro area relative to the United States. We ask to what extent the lack of cross-country labor mobility can account for unemployment dynamics in Europe. Our analytical model incorporates downward nominal wage rigidity as well as an endogenous migration decision. Firms are unable to freely adjust wages during economic contractions, generating an asymmetric distribution of unemployment over the business cycle. The model is calibrated to the dynamics of unemployment and net migration in a typical euro area country. An increase in labor mobility to that observed in the United States and holding all other parameters fixed would reduce the volatility of euro area unemployment by 40% and return 1 million unemployed to the workforce. The welfare cost to a typical euro area country of the currency union is 4.7 percent of permanent consumption; increasing labor mobility reduces this cost to about 4.1 percent.

Works in progress

Returns to friendshoring, (with Anusha Chari and Linda L. Tesar).