Micro and Macro Perspectives of the Aggregate Labor Market

November 17-18
Philipp Kircher of University of Edingburg; Guido Menzio of University of Pennsylvania; and Giuseppe Moscarini of Yale University, Organizers

Session 1 Product Market Frictions

Ed Nosal, Federal Reserve Bank of Cleveland; Yuet-Yee Wong, Binghamton University; and Randall Wright, University of Wisconsin at Madison and NBER

Who Wants to be a Middleman?

This paper studies agents' decisions to act as producers or middlemen, and hence endogenizes market composition, in a search-theoretic model of intermediation. Nosal, Wong, and Wright extend the standard framework to allow nonlinear utility, general bargaining, costs, and returns. Also, they go beyond the usual steady state analysis by considering dynamics. The analysis remains tractable, delivering clean and sometimes surprising results. Intermediation can be essential, and equilibrium is efficient only under strict conditions. While the model with middlemen holding goods displays uniqueness, the version with middlemen holding assets has multiple steady states and interesting dynamics — suggesting there is something special about financial intermediation.

Leo Kaas and Bihemo Kimasa, University of Konstanz

Firm Dynamics with Frictional Product and Labor Markets

This study analyzes the joint dynamics of prices, output, employment and wages across firms. Kaas and Kimasa develop a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Prices and wages are dispersed across firms, reflecting differences in firm size, firm productivity and demand. Firm-specific productivity and demand shocks have distinct implications for the firms’ employment, output and price adjustments. Using panel data on prices and output for German manufacturing firms, the researchers calibrate the model to evaluate its implications for firm dynamics and for the cross-sectional dispersion of prices, wages and labor productivity. They use the model to examine the effects of product market deregulation on the aggregate economy.

Session 2 Firms and Credit Constraints

Aubhik Khan, Tatsuro Senga, and Julia Thomas, Ohio State University

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity

Khan, Senga, and Thomas study aggregate fluctuations in an economy where firms have persistent differences in total factor productivities, capital and debt or financial assets. Investment is funded by retained earnings and non-contingent debt. Firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral. On average, larger firms, those with more collateral, have higher levels of investment than smaller firms with less collateral. Since large and small firms draw from the same productivity distribution, this implies an insufficient allocation of capital in small firms and thus reduces aggregate total factor productivity, capital and GDP. The researchers consider business cycles driven by shocks to aggregate total factor productivity and by credit shocks. The latter are financial shocks that worsen firms' cash on hand. In equilibrium, the researchers' nonlinear loan rate schedules drive countercyclical default risk and exit. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of firms and a deterioration in the allocation of capital that amplifies the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock, and more closely resembles the 2007 U.S. recession in several respects. A rise in default and a substantial fall in entry yield a large decline in the number of firms. Measured TFP falls for several periods, as do employment, investment and GDP, and the ultimate declines in investment and employment are large relative to that in TFP. Moreover, the recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of firms.

Kyle F. Herkenhoff, University of Minnesota; Gordon M. Phillips, Dartmouth College and NBER; and Ethan Cohen-Cole, University of Maryland

The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship

How does consumer credit access impact job flows, earnings, and entrepreneurship? To answer this question, Herkenhoff, Phillips, and Cohen-Cole build a new administrative dataset which links individual employment and entrepreneur tax records to TransUnion credit reports, and they exploit the discrete increase in consumer credit access following bankruptcy flag removal. After flag removal, individuals flow into self-employment. New entrants earn more, borrow significantly using unsecured and secured consumer credit, and are more likely to become an employer business. In addition, after flag removal, non-employed and self-employed individuals are more likely to find unemployment-insured "formal" jobs at larger firms that pay greater wages. These estimates imply that firms believe previously bankrupt workers are 3.8 percent less productive than non-bankrupt workers, on average. These results suggest that consumer credit access matters for each stage of entrepreneurship and that credit-checks may be limiting formal sector employment opportunities.

Session 3 Sources of Wage Inequality

Christian Bayer and Moritz Kuhn, University of Bonn

Which Ladder to Climb? Evidence on Wages of Workers, Jobs, and Plants

How much does your wage depend on for whom you work relative to what job you do? To answer this question, Bayer and Kuhn use linked employer-employee data from a representative German administrative survey which provides exceptionally detailed information on job characteristics, earnings, and hours. In this data, observables can explain more than 80 percent of wage variation. This allows the researchers to decompose wages into an individual, a plant, and a job component. Among the three, the job component, most importantly the hierarchy level of a worker, explains 40 percent of the rise in average wages and almost all the rise in wage inequality over the life-cycle. The plant component, i.e. transitions from low-paying to high-paying plants, by contrast account for only 20 percent of the life-cycle wage increase.

Simon Board and Moritz Meyer ter Vehn, University of California at Los Angeles, and Tomasz Sadzik, New York University

Recruiting Talent

Board, Meyer ter Vehn, and Sadzik propose a model of firm dynamics in which a firm's primary asset is the talent of its workforce. Firms compete in wages to attract applicants, and managers seek to identify the most talented. Over time, a firm's quality evolves as today's recruits become tomorrow's managers. If talent is scarce, firm-applicant matching is positive assortative, with better firms posting higher wages and attracting better applicants. As a result, the economy converges to a steady state featuring persistent dispersion in talent, wages and productivity. Along the path, if firms are initially similar, then high-wage firms incur short term losses while they accumulate the talent that guarantees a sustainable competitive advantage. The researchers also show that equilibrium leads to an inefficient selection of talent into the industry, and can be improved by policies that reduce wage dispersion.

Santiago Caicedo Soler, University of Chicago; Robert E. Lucas, Jr., University of Chicago and NBER; and Esteban Rossi-Hansberg, Princeton University and NBER

Learning, Career Paths and the Distribution of Wages (NBER Working Paper No. 22151)

Caicedo Soler, Lucas, and Rossi-Hansberg develop a theory of career paths and earnings in an economy in which agents organize in production hierarchies. Agents climb these organizational hierarchies as they learn stochastically from other individuals. Earnings grow over time as agents acquire knowledge and occupy positions with larger numbers of subordinates. The researchers contrast these and other implications of the theory with U.S. census data for the period 1990 to 2010. The model matches well the Lorenz curve of earnings as well as the observed mean experience-earnings profiles. They show that the increase in wage inequality over this period can be rationalized with a shift in the distribution of the complexity and profitability of technologies relative to the distribution of knowledge in the population.

Session 4 Innovation and Imitation

Erzo G.J. Luttmer, University of Minnesota

An Assignment Model of Knowledge Diffusion and Income Inequality

Randomness in individual discovery disperses productivities, whereas learning from others keeps productivities together. Long-run growth and persistent earnings inequality emerge when these two mechanisms for knowledge accumulation are combined. In this paper, Luttmer considers an economy in which those with more useful knowledge can teach others, with competitive markets assigning students to teachers. In equilibrium, students with an ability to learn quickly are assigned to teachers with the most productive knowledge. This sorting on ability implies large differences in earnings distributions conditional on ability, as shown using explicit formulas for the tail behavior of these distributions.

Espen Moen, Norwegian School of Management, and Edgar Preugschat and Tom-Reiel Heggedal, Dortmund University

Productivity Spillovers through Labor Mobility in Search Equilibrium

This paper proposes an explicit model of spillovers through labor flows in a framework with search frictions. Firms can choose to innovate or to imitate by hiring a worker from a firm that has already innovated. Moen, Preugschat, and Heggedal show that if innovating firms can commit to long-term wage contracts with their workers, productivity spillovers are fully internalized. If firms cannot commit to long-term wage contracts, there is too little innovation and too much imitation in equilibrium. The researchers' model is tractable and allows them to analyze welfare effects of various policies in the limited commitment case. They find that subsidizing innovation and taxing imitation improves welfare. Moreover, allowing innovating firms to charge quit fees or rent out workers to imitating firms also improves welfare. By contrast, non-pecuniary measures like restrictions on mobility, interpreted as reducing matching efficiency between imitating firms and workers from innovating firms, always reduce welfare.