Working papers
Heterogeneous Passthrough From TFP to Wages
with Mons Chan and Sergio Salgado
We examine the passthrough of firms' idiosyncratic productivity shocks to workers' wages using rich matched employer-employee data from Denmark which allows us to control for unobserved worker and firm heterogeneity. We find an average elasticity of incumbent workers' hourly wages to firms' productivity of 0.08. The passthrough of firm shocks to wages is strongly asymmetric, in that wages are twice as responsive to negative shocks as to positive shocks. Failing to account for workers' endogenous mobility underestimates the passthrough of negative shocks and reverses the asymmetry. Passthrough decreases with labor market share and productivity but increases with income and ability. Recessions reduce passthrough from positive shocks to zero but do not affect passthrough of negative shocks. Workers with wage growth after switching to a new firm typically move from low to high productivity firms; In contrast, workers with a decline in wages after switching move between firms of similar productivity.
Over-optimism About Graduation and College Financial Aid
with Emily Moschini and Gajendran Raveendranathan
Many student debtors who once enrolled in a bachelor’s program have not completed their college degree. We establish empirically that college students and their parents are overly optimistic about the probability of college graduation when making college enrolment decisions. We incorporate such over-optimism into an overlapping generations model, which also includes family transfers, federal student loans, and a private student loan market. We discipline these model attributes using panel data from the U.S. Bureau of Labor Statistics and the U.S. Department of Education, and then examine the effects of eliminating over-optimism and of expanding federal student loan limits. We find that eliminating over-optimism, despite correcting mistaken beliefs, lowers welfare as a result of the equilibrium adjustments of income taxes, family transfers, and skill (which depends on parental education). Expanding federal student loan limits reduces welfare for low-skill students from poor families, a result driven by the presence of over-optimism.
Wage Setting and Passthrough: The Role of Market Power, Production Technology and Adjustment Costs [New Draft!]
with Mons Chan, Elena Mattana, and Sergio Salgado
We develop a dynamic model of firms and wage setting in imperfect labor markets and show that markdowns, and thus the link between firm productivity and wages (passthrough), depend on firm-specific labor supply elasticities, production technology, and adjustment costs. Our framework allows us to recover the full distribution of firm-level productivity, wage markdowns, passthrough and labor supply elasticities, controlling for unobserved worker heterogeneity. Using administrative data from Denmark, we find that on average, firms respond to a 1% increase in idiosyncratic productivity by lowering (widening) markdowns by 1.7% and increasing marginal productivity by 2.1%, leading to a 0.4% increase in wages. Aggregate shocks have full passthrough to wages and do not affect markdowns. Firms hoard labor and raise wages in response to adjustment costs and uncertainty about future productivity, reducing passthrough to wages. Labor market power also reduces passthrough, with large firms having one fifth of the passthrough of smaller firms. Both market imperfections combined decrease the labor income volatility arising from firm risk by 77%.
Understanding the Decline in Occupational Mobility [Draft coming soon]
The process of workers switching from occupation to occupation is a vital part of career development and self-discovery. Using the CPS and SIPP, I show that occupational switching rates have declined significantly over the past 25 years. This decline has been robust for each consecutive cohort and is more pronounced for younger workers than older workers. The decline could imply that it is becoming more difficult and costly for workers to find better jobs (due to increases in switching costs), leaving people increasingly stuck in poorly matched and unfulfilling careers. Paradoxically, it could also mean that finding better jobs is becoming easier (thanks to advances in ICT), since workers with good job matches are less likely to switch. This paper develops a dynamic discrete choice life-cycle model to separately identify and quantify how changes in switching costs and information over time contribute to the observed declines in occupation switching. The result is that increased switching costs drive about 72% of the decline, while better information drives about 8%. The increases in switching costs have led to less productive occupational matches for workers and thus significant welfare losses. On average, workers have lost 3% of their total lifetime income from increases in switching costs over this period.
Firm Productivity and Labor Quality [Draft coming soon]
with Mons Chan, Sergio Salgado, and Frederic Warzynski
In this paper we argue that a large fraction of the observed dispersion in firm productivity can be accounted for by differences in labor quality. In order to investigate this claim, we propose an estimation method that combines a non parametric production function estimation with a series of two-way fixed effect wage regressions with time-varying firm fixed effects which allow us to control for differences in labor quality across firms and time. We implement this method on a large employer-employee matched panel dataset from Denmark and find that around 60% of the dispersion in productivity can be explained by cross-sectional differences in the quality of labor. A similar fraction of the dispersion in idiosyncratic shocks to firm productivity can be attributed to changes in the quality of the labor force hired by the firm. Using these labor quality-adjusted measures of productivity, we find a significant degree of positive assortative matching between high ability workers and high productivity firms. High productivity firms also tend to pay higher wages per unit of ability than low productivity firms. We also find that firms react to productivity shocks by adjusting both the quantity and quality of their labor force. We then discuss the degree to which cross-sectional wage inequality may be driven by dispersion in firm productivity.
Occupational Licensing and Labor Market Fluidity
with Morris Kleiner
Accepted at JOLE
We show that occupational licensing has significant negative effects on labor market fluidity, defined as cross-occupation mobility, and positive effects on wage growth. Using a balanced panel of workers constructed from Current Population Survey (CPS) and Survey of Income and Program Participation (SIPP) data, we analyze the link between occupational licensing and labor market outcomes. We find that occupational licensing represents a barrier to entry for both non-employed workers and employed ones. The effect is more prominent for employed workers than those entering from non-employment, because the opportunity cost of acquiring a license is much higher for employed individuals. We also find that average wage growth is higher for licensed workers than non-licensed workers. Workers who have just switched into an occupation that requires licensing also experience higher wage growth on average than their non- licensed counterparts whether they have switched in from other occupations or from unemployment. We find significant heterogeneity in the licensing effect across different occupation groups. These results hold across various data sources, time spans, and indicators of being licensed. Finally, we see that during the COVID-19 pandemic the effect of licensing on occupational transitions is similar that of to the pre-pandemic period, but the effect on wage growth disappears.
Works in Progress
Trade, Occupation Sorting, and Inequality [Draft available upon request]
with Luke Rawling and Mons Chan
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 easily aggregated and taken to industry-level data, and use the calibrated model to examine recent trends in employment, wages and trade in the USA. We use public OES and CPS data to show empirical evidence that a significant fraction of the growth in wage inequality in the USA is due to changes in firm/industry specialization and occupation sorting. To understand and measure the underlying causes of these trends, we calibrate the model to occupation and industry data from the OES and input-output tables. The results suggest that 1/3rd of the increases in wage inequality stem from decreases in inter-industry trade frictions with the remaining 2/3rds stemming from changes in technology and labor supply. Falling trade frictions are also responsible for all of the increases in occupational sorting and concentration. Had trade frictions been held at their 2002 level, productivity growth would have led to an increase in vertical integration, rather than the decrease observed in the data.
Student Loans and Early Employment Outcomes [Draft available upon request]
with Emily Moschini and Thomas Phelan
In this paper I investigate the link between student debt and post-graduation job market outcomes. Using a combination of survey and administrative data on graduates in two cohorts, I show that there is a significant negative correlation between the amount of debt upon graduation and the probability of finding a job which matches your education. I use evidence from Equifax to motivate a model of job search and long-term debt where the cost of consumer credit depends on your student loan balance. I successfully calibrate the model to the data and show that this debt constraint mainly binds for high and medium human capital graduates, as it affects the amount of time they are able to spend searching for a good job. I then show that alternative repayment and interest rate policies would have improved labor market outcomes for graduates in 07/08 by allowing extended search times, increasing match quality and possibly lifetime productivity.
MPC Heterogeneity and Firm Level Shocks
with Mons Chan, Sergio Salgado and Bastian Schulz
Occupational Concentration and Re-employment Risk
with Bent Jesper Christensen and Similan Rujiwattanapong
Understanding Worker Flows across Heterogeneous Firms
with Bastian Schulz
Heterogeneous Passthrough From TFP to Wages
with Mons Chan and Sergio Salgado
We examine the passthrough of firms' idiosyncratic productivity shocks to workers' wages using rich matched employer-employee data from Denmark which allows us to control for unobserved worker and firm heterogeneity. We find an average elasticity of incumbent workers' hourly wages to firms' productivity of 0.08. The passthrough of firm shocks to wages is strongly asymmetric, in that wages are twice as responsive to negative shocks as to positive shocks. Failing to account for workers' endogenous mobility underestimates the passthrough of negative shocks and reverses the asymmetry. Passthrough decreases with labor market share and productivity but increases with income and ability. Recessions reduce passthrough from positive shocks to zero but do not affect passthrough of negative shocks. Workers with wage growth after switching to a new firm typically move from low to high productivity firms; In contrast, workers with a decline in wages after switching move between firms of similar productivity.
Over-optimism About Graduation and College Financial Aid
with Emily Moschini and Gajendran Raveendranathan
Many student debtors who once enrolled in a bachelor’s program have not completed their college degree. We establish empirically that college students and their parents are overly optimistic about the probability of college graduation when making college enrolment decisions. We incorporate such over-optimism into an overlapping generations model, which also includes family transfers, federal student loans, and a private student loan market. We discipline these model attributes using panel data from the U.S. Bureau of Labor Statistics and the U.S. Department of Education, and then examine the effects of eliminating over-optimism and of expanding federal student loan limits. We find that eliminating over-optimism, despite correcting mistaken beliefs, lowers welfare as a result of the equilibrium adjustments of income taxes, family transfers, and skill (which depends on parental education). Expanding federal student loan limits reduces welfare for low-skill students from poor families, a result driven by the presence of over-optimism.
Wage Setting and Passthrough: The Role of Market Power, Production Technology and Adjustment Costs [New Draft!]
with Mons Chan, Elena Mattana, and Sergio Salgado
We develop a dynamic model of firms and wage setting in imperfect labor markets and show that markdowns, and thus the link between firm productivity and wages (passthrough), depend on firm-specific labor supply elasticities, production technology, and adjustment costs. Our framework allows us to recover the full distribution of firm-level productivity, wage markdowns, passthrough and labor supply elasticities, controlling for unobserved worker heterogeneity. Using administrative data from Denmark, we find that on average, firms respond to a 1% increase in idiosyncratic productivity by lowering (widening) markdowns by 1.7% and increasing marginal productivity by 2.1%, leading to a 0.4% increase in wages. Aggregate shocks have full passthrough to wages and do not affect markdowns. Firms hoard labor and raise wages in response to adjustment costs and uncertainty about future productivity, reducing passthrough to wages. Labor market power also reduces passthrough, with large firms having one fifth of the passthrough of smaller firms. Both market imperfections combined decrease the labor income volatility arising from firm risk by 77%.
Understanding the Decline in Occupational Mobility [Draft coming soon]
The process of workers switching from occupation to occupation is a vital part of career development and self-discovery. Using the CPS and SIPP, I show that occupational switching rates have declined significantly over the past 25 years. This decline has been robust for each consecutive cohort and is more pronounced for younger workers than older workers. The decline could imply that it is becoming more difficult and costly for workers to find better jobs (due to increases in switching costs), leaving people increasingly stuck in poorly matched and unfulfilling careers. Paradoxically, it could also mean that finding better jobs is becoming easier (thanks to advances in ICT), since workers with good job matches are less likely to switch. This paper develops a dynamic discrete choice life-cycle model to separately identify and quantify how changes in switching costs and information over time contribute to the observed declines in occupation switching. The result is that increased switching costs drive about 72% of the decline, while better information drives about 8%. The increases in switching costs have led to less productive occupational matches for workers and thus significant welfare losses. On average, workers have lost 3% of their total lifetime income from increases in switching costs over this period.
Firm Productivity and Labor Quality [Draft coming soon]
with Mons Chan, Sergio Salgado, and Frederic Warzynski
In this paper we argue that a large fraction of the observed dispersion in firm productivity can be accounted for by differences in labor quality. In order to investigate this claim, we propose an estimation method that combines a non parametric production function estimation with a series of two-way fixed effect wage regressions with time-varying firm fixed effects which allow us to control for differences in labor quality across firms and time. We implement this method on a large employer-employee matched panel dataset from Denmark and find that around 60% of the dispersion in productivity can be explained by cross-sectional differences in the quality of labor. A similar fraction of the dispersion in idiosyncratic shocks to firm productivity can be attributed to changes in the quality of the labor force hired by the firm. Using these labor quality-adjusted measures of productivity, we find a significant degree of positive assortative matching between high ability workers and high productivity firms. High productivity firms also tend to pay higher wages per unit of ability than low productivity firms. We also find that firms react to productivity shocks by adjusting both the quantity and quality of their labor force. We then discuss the degree to which cross-sectional wage inequality may be driven by dispersion in firm productivity.
Occupational Licensing and Labor Market Fluidity
with Morris Kleiner
Accepted at JOLE
We show that occupational licensing has significant negative effects on labor market fluidity, defined as cross-occupation mobility, and positive effects on wage growth. Using a balanced panel of workers constructed from Current Population Survey (CPS) and Survey of Income and Program Participation (SIPP) data, we analyze the link between occupational licensing and labor market outcomes. We find that occupational licensing represents a barrier to entry for both non-employed workers and employed ones. The effect is more prominent for employed workers than those entering from non-employment, because the opportunity cost of acquiring a license is much higher for employed individuals. We also find that average wage growth is higher for licensed workers than non-licensed workers. Workers who have just switched into an occupation that requires licensing also experience higher wage growth on average than their non- licensed counterparts whether they have switched in from other occupations or from unemployment. We find significant heterogeneity in the licensing effect across different occupation groups. These results hold across various data sources, time spans, and indicators of being licensed. Finally, we see that during the COVID-19 pandemic the effect of licensing on occupational transitions is similar that of to the pre-pandemic period, but the effect on wage growth disappears.
Works in Progress
Trade, Occupation Sorting, and Inequality [Draft available upon request]
with Luke Rawling and Mons Chan
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 easily aggregated and taken to industry-level data, and use the calibrated model to examine recent trends in employment, wages and trade in the USA. We use public OES and CPS data to show empirical evidence that a significant fraction of the growth in wage inequality in the USA is due to changes in firm/industry specialization and occupation sorting. To understand and measure the underlying causes of these trends, we calibrate the model to occupation and industry data from the OES and input-output tables. The results suggest that 1/3rd of the increases in wage inequality stem from decreases in inter-industry trade frictions with the remaining 2/3rds stemming from changes in technology and labor supply. Falling trade frictions are also responsible for all of the increases in occupational sorting and concentration. Had trade frictions been held at their 2002 level, productivity growth would have led to an increase in vertical integration, rather than the decrease observed in the data.
Student Loans and Early Employment Outcomes [Draft available upon request]
with Emily Moschini and Thomas Phelan
In this paper I investigate the link between student debt and post-graduation job market outcomes. Using a combination of survey and administrative data on graduates in two cohorts, I show that there is a significant negative correlation between the amount of debt upon graduation and the probability of finding a job which matches your education. I use evidence from Equifax to motivate a model of job search and long-term debt where the cost of consumer credit depends on your student loan balance. I successfully calibrate the model to the data and show that this debt constraint mainly binds for high and medium human capital graduates, as it affects the amount of time they are able to spend searching for a good job. I then show that alternative repayment and interest rate policies would have improved labor market outcomes for graduates in 07/08 by allowing extended search times, increasing match quality and possibly lifetime productivity.
MPC Heterogeneity and Firm Level Shocks
with Mons Chan, Sergio Salgado and Bastian Schulz
Occupational Concentration and Re-employment Risk
with Bent Jesper Christensen and Similan Rujiwattanapong
Understanding Worker Flows across Heterogeneous Firms
with Bastian Schulz