Network Differentials and Between-Group Wage Gaps: Application to Immigration in Canada [Undergoing revision. Old Draft (June 2023)]

This paper proposes that the network structure of the labour market sheds light on inequality between immigrants and natives. Since almost half of all jobs are found through personal contacts, and since these personal contacts tend to be of the same-ethnicity, differences in average labour market barriers or ability between native and immigrant groups will generate fundamental differences in the personal contacts used for job search (network differentials), which  has the potential to exacerbate labor market gaps between immigrants and natives. I imbed networks into a search model and calibrate it to Canadian data to quantify the extent to which network differentials explain gaps in immigrant and native wages. The model implies that just over 1/4 of the observed wage gap is attributed to immigrants sorting into lower paying firms and having lower bargaining power within firm rather than due to their ability, consistent with previous empirical work. The novel result is that network differentials account for more than 1/5 of this firm-component of the gap. The model also allows for a decomposition of the wage gap into a between-firm (sorting) component and a within-firm (monopsony power) component. I find that the majority of the wage gap (80%) comes from firms exerting additional labour market power over immigrants, rather than differences in sorting. Although sorting does not explain a large portion of the wage gap on average, it explains almost half of the gap for higher ability immigrants. 

Trade, Occupational Sorting, and Inequality (with Mons Chan and Ming Xu) [Undergoing revision. Draft coming soon]

Firms react to changes in factor prices with intensive and extensive-margin employment adjustments at the occupational-level. We study the distributional and aggregate consequences of this make-or-buy dynamic by developing a novel network model of heterogeneous firm-to-firm trade where the boundary of each firm depends on factor prices and firm-occupation comparative advantage in input-production. We show that the model can be aggregated and taken to industry-level data, and use the calibrated model to examine recent trends in employment, wages and trade in the US. Using public ACS data, we provide empirical evidence that a significant fraction of the growth in wage inequality in the US is due to changes in firm/industry specialization and occupational sorting. To understand and measure the underlying causes of these trends, we calibrate the model to occupation and industry data from the ACS and input-output tables. Our model allows us to decompose the rise in wage variation into a) changes in inter-industry trade frictions, b) changes in production technology and c) changes in labor supply. We show that changes in trade frictions have substantial implications for wage inequality and the increases in occupational sorting and concentration.

The Role of Sorting, Productivity and Monopsony Power in Between Group Wage Gaps [Draft coming soon]

Systematic wage differences between workers in observably different groups (e.g., male/female, immigrant/native) is inherently difficult to analyze due to unobservable differences in worker ability and labour supply. I develop an empirical framework that allows one to decompose wage gaps between worker groups into four components: Ability, within-firm bargaining power, and between firm sorting based on firm market power and firm productivity. The framework borrows tools from the production function literature to estimate firm specific productivity and firm-group specific labour supply elasticities and markdowns, allowing one to disentangle a workers ability from their bargaining power. This framework builds on previous literature in three important respects. First, it easily accommodates for a larger number of worker groups. Secondly, rather than just estimating the gap that arises from differences in between-firm sorting, it can determine whether these firms differ in their pay-setting policies due to market power differences or productivity differences, a distinction that will have policy implications. Thirdly, unlike the literature, it does not rely on a normalization assumption that directly shifts the ability gap relative to the within-firm bargaining gap. Instead, I develop an iterative approach that directly estimates within-firm bargaining differences, allowing one to read off ability directly.