Distributional Welfare Effects of Labour Market Power
Labour market power-- firms marking down wages below workers’ marginal product of labour-- has aggregate welfare costs. But, how are these costs distributed across members of a society? Labour market power generates winners and losers, as wage markdowns shift revenue toward firm owners at workers' expense. Yet gains and losses across these groups are not clear cut. Markdowns are heterogeneous across firms, households earn both labour and capital income, and efficiency losses may be large enough to make everyone worse off. I measure the distributional welfare effects of labour market power using a second-order approximation of households' equivalent variation. I combine this approximation with a structural model of labour market power, and take it to administrative Canadian data. I find that the incidence of labour market power falls mainly on those in the top income quartile, with the upper-middle class facing the greatest net cost and the top percentile of income earners gaining the greatest net benefit.
Endogenous On-the-Job Search and Inflation
I analyze how endogenous on-the-job search impacts inflation in a model with sticky prices and a labour market characterized by Bertrand bargaining over wages, and two types of jobs: high and low productivity. I first show that endogenous job-search has an inflationary effect in the model. Employed workers who search for jobs tend to get higher pay when they find one, which makes it less attractive for firms to open new positions. This reduces employment and production in my model, ultimately pushing up prices. I then show that my model gives rise to a trade-off between productive efficiency and inflation. Although workers employed in high productivity jobs produce more per unit of labour, the bargaining process makes it unprofitable for firms to match with such workers that search on the job. So, when there is a higher proportion of workers employed in high productivity jobs, firms open relatively fewer positions, leading to less employment and more inflation.
Presented at New York Fed Junior Macro Workshop and Bank of Canada Brown Bag Lunch
Fiscal Spillovers: The Case of US Corporate and Personal Income Taxes
with D. Hauser and R. Priftis
Reject and Resubmit at the Journal of Applied Econometrics
When the United States changes personal or corporate income tax rates, the economic effects are not just contained to that country. They spill over to other countries. However, the size and sign of these spillovers are not clear. We measure the impact of changes to personal and corporate income tax rates in the United States on its trading partners. We follow the methodology introduced by Mertens and Ravn (2013) to first identify unanticipated changes to US tax rates. We then estimate the spillover effects of these changes to Canada and other US trading partners. We find that US corporate income tax cuts generally have negative cross-border spillover effects, though these effects are usually small. In Canada, these spillover effects turn positive over the long run. US personal income tax cuts generally have positive and sizable spillover effects that are most pronounced in emerging-market economies without fully flexible exchange rate regimes.
Presented at Canadian Economics Association Conference