Distributional Welfare Effects of Labour Market Power
Labour market power, when firms mark down wages below workers’ marginal product of labour, has aggregate welfare costs. But how are these costs distributed across members of society? Labour market power generates winners and losers, as wage markdowns shift income toward firm owners at workers' expense. Yet gains and losses across these groups are not clear-cut. Markdowns may be heterogeneous across firms, households can 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 in Canada using a money-metric formula that captures how welfare changes when labour market power is eliminated from the economy. This formula captures how labour market power affects household welfare through both labour income (lower wages) and capital income (higher profits). I combine this measure with a structural model of labour market power and apply it to Canadian administrative data. I find that the burden of labour market power falls mainly on those in the top income quartile, with income earners between the 75th and 95th percentile gaining the most from its elimination and the top percentile experiencing the largest welfare losses.
Presented at the Fourth Women in Central Banking Workshop and Midwest Macroeconomics
Endogenous On-the-Job Search and Inflation
In this paper, I explore how workers' job search decisions impact inflation over the business cycle. I do so in a model with sticky prices and a labour market characterized by endogenous job search, Bertrand bargaining over wages, and two types of jobs: high and low productivity. Workers can choose to search for a better job while employed, leading them to climb the job ladder from low- to high-productivity firms, and bargain up their wages. Workers' job search decisions depend on both how likely they are to find a new job, and the gains from moving. I discipline these search decisions using data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations Labour Market Supplement. Using a shift-share instrument for labour market tightness, I find that, conditional on the gains from switching jobs, on-the-job search falls with labour market tightness. At the same time, the gains from moving rise in expansions, encouraging search; in the calibrated model, this force dominates, generating pro-cyclical on-the-job search. Relative to a model in which job search is constant over the business cycle, endogenizing search increases inflationary pressures by raising firms' expected labour costs.
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
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