“Search and the Sources of Life-Cycle Inequality,” (International Economic Review, Vol. 62, Issue 4, lead article)
Abstract: In this paper, I study how initial wealth affects lifetime earnings inequality when labor markets are frictional. To do this, I construct a model life-cycle model with search frictions, incomplete markets, and endogenous human capital accumulation. In the model incomplete markets prevent low-wealth workers from smoothing consumption, which causes them to accept low pay jobs while unemployed. In anticipation, they build savings rather than human capital while employed. This amplifies the importance of initial wealth for life-cycle inequality. Using this model, I find that differences in initial wealth cause larger differences in lifetime earnings than either initial human capital or ability.
Note: Previously circulated under the titles “Borrowing Constraints, Search, and Life-Cycle Inequality” and “Wealth Effects, Search, and Life-Cycle Inequality”
Abstract: A participation externality occurs when vacancy creation depends on workforce composition. As marginal workers enter the labor market, they lower the average quality of the workforce. This suppresses vacancy creation but is not internalized by the new entrants. This paper studies how this externality interacts with search externalities and the efficacy of policies at addressing it. These externalities interact because either party may retain an inefficient share of the surplus and workforce composition affects the expected surplus. We show that when chosen optimally, minimum wages and unemployment insurance partially address both externalities, but minimum wages primarily affect participation, while unemployment insurance primarily affects search externalities.
“Testing the Independence of Job Arrival Rates and Wage Offers,” joint with Christine Braun, Bryan Engelhardt, and Peter Rupert (Labour Economics, Vol. 63, April 2020)
Abstract: Is the arrival rate of a job independent of the wage that it pays? We answer this question by testing whether unemployment insurance alters the job finding rate differentially across the wage distribution. To do this, we use a Mixed Proportional Hazard Competing Risk Model in which we classify quantiles of the wage distribution as competing risks faced by searching unemployed workers. Allowing for flexible unobserved heterogeneity across spells, we find that unemployment insurance increases the likelihood that a searcher matches to higher paying jobs relative to low or medium paying jobs, rejecting the notion that wage offers and job arrival rates are independent. We show that dependence between wages and job offer arrival rates explains 9% of the increase in the duration of unemployment associated with unemployment insurance.
Note: Previously circulated under the title “Do Workers Direct their Search?” and “Testing the Independence of Job Arrival Rates and Wage Offers in Model of Job Search”
Abstract: We develop a model that allows us to understand the cyclicality of part and full-time employment. In the model, idiosyncratic match quality determines a jointly optimal choice of part or full-time work. This choice is based on the surplus generated by each type of employment. Because of higher fixed costs, the surplus from full-time employment is more procyclical than part-time employment. As a result, inflows from full-time employment outweigh outflows to unemployment and cause part-time employment to be countercyclical, as observed in the data. We show that this composition effect accounts for the majority of the cyclical properties of part and full-time employment. We also show that subsidizing part-time employment during a recession is far more effective at limiting a downturn in the economy than an equally expensive unemployment insurance expansion.
Abstract: By making workers more selective, unemployment insurance (UI) increases re-employment wages and thereby generates a positive fiscal externality. We provide a sufficient-statistics formula for evaluating the size of this fiscal externality and argue theoretically that it is likely to be small. In a standard sequential search model, the effect of UI on wages is proportional to its effect on the job-finding hazard; the slope of the relation-ship between these elasticities depends on a small number of estimable statistics, key among them observed worker flows. Plausible calibrations of the model imply that the magnitude of the wage elasticity is small relative to the job-finding elasticity. Although ignoring the wage effect of UI would over-estimate its fiscal cost and under-estimate its welfare benefit, the model predicts the magnitude of this bias to be small.
“Wealth, Search, and Human Capital over the Business Cycle,” joint with Stan Rabinovich [PDF available upon request]
Abstract: We assess how an economy’s wealth distribution shapes its labor market dynamics. We answer this question in a quantitative model featuring directed search, incomplete markets, aggregate shocks, and endogenous on-the-job human capital accumulation. On the individual level, poorer workers apply for lower-wage jobs when unemployed and under-accumulate human capital when employed to self-insure against unemployment risk. These differences in behavior by wealth are intensified in recessions when jobs are scarce and unemployment risk is high. On the aggregate level, an economy entering a recession with more wealth dispersion suffers a greater reduction in human capital and hence more persistent earnings and output losses. We calibrate the model and use it to evaluate the importance of the wealth distribution for the impact of the Great Recession.
Note: Previously circulated under the title “Precautionary Search and Human Capital over the Business Cycle”
Abstract: In the U.S., workers whose past earnings were below a threshold are ineligible to receive unemployment insurance (UI). This creates a discontinuous jump in their value of unemployment should they separate. We exploit this jump with a regression discontinuity design using administrative panel data on earnings to estimate the effect of UI receipt on earnings. We find a sizable local effect from UI eligibility on earnings in the next employer, around $300 or roughly 10% of quarterly earnings. However, this understates the causal effect of UI receipt, because not every unemployed worker claims UI. We present an equilibrium directed search model that relates the reduced form estimates to causal effects on welfare, earnings and unemployment duration.
“Beliefs and Affirmative Action in Employment,” joint with Eric R. Young
Abstract: In this paper we consider the effectiveness of Affirmative Action policies. We show that when firms and workers both face asymmetric information, Black workers may attribute poor employment outcomes to taste-based discrimination that actually results from statistical discrimination by firms. This leads to less investment in human capital by Black workers, who expect that scant employment prospects will yield little return, which simultaneously reinforces the firms belief about the qualifications of Black workers. We show that under this circumstance, Affirmative Action can increase Black workers’ investment in human capital by revealing information about the degree of discrimination they face, which can cause long-term increases in human capital investment even if the Affirmative Action policy is only enacted for a short period.
“Public Education Spending and Intergenerational Mobility”
Abstract: This paper seeks to understand the role that spending on public education plays in determining the persistence of income across generations. It shows that indeed, increases in public education spending increase intergenerational mobility among the least wealthy in the economy. Unlike previous literature, I employ an instrument for government spending in order to assess the effect of public spending on education in changing persistence and use the canonical empirical model of intergenerational elasticity (Solon, 1992). In particular, I incorporate exogenous changes in spending on public education caused by court-mandated school-finance reform, following Jackson et al. (2015). Overall, I find that an increase in government spending on education significantly decreases the extent to which parents’ income matters in determining their child’s income.