joint with Jan Eeckhout (UCL/UPF), submitted
We propose a theory that analyzes how a worker’s asset holdings affect their job productivity. In a labor market with uninsurable risk, workers choose to direct their search to jobs that trade off productivity and wages against unemployment risk. Workers with low asset holdings have a precautionary job search motive, they direct their search to low productivity jobs because those offer a low risk at the cost of low productivity and a low wage. We show that such sorting occurs under a condition closely related to Decreasing Relative Risk Aversion. We calibrate the infinite horizon economy and find that this mechanism is quantitatively important. We evaluate a tax financed unemployment insurance (UI) scheme and how it affects welfare. We find that in the aggregate across all workers, the insurance effect of a rise in UI dominates the incentive effect of search. And even if higher benefits lead to productivity losses from the decline in firm entry, those losses are compensated by the insurance value of benefits. However, the welfare gains and losses are heterogeneously distributed: the unemployed and those with low asset holdings in particular stand to gain from higher UI benefits. Finally, we compare a one-off severance payment with per period benefits and find that per period benefits generate superior welfare.
joint withFabien Postel-Vinay (UCL)
We combine information from the British Household Panel Study (BHPS) and the UK Longitudinal Household Study (UKHLS, a.k.a. Understanding Society) to construct consistent time series of aggregate worker stocks, worker flows and earnings in the UK over the 1992-2016 period for all workers as well as for two separate education groups. We propose a method to harmonise data be- tween the BHPS and UKHLS, which we validate by checking the consistency of some of our headline time series with equivalent series produced from other sources, notably by the ONS. In addition to drawing a detailed aggregate picture of the UK labour market over the past two and a half decades, we hope that our analysis will help demonstrate the usefulness of a combined BHPS/UKHLS data set for the analysis of UK labour markets.
This paper investigates the importance of credit market frictions on labour market outcomes. I build a tractable search and matching model of the labour market with firm dynamics and heterogeneity in productivity and size. Firms produce output using labour, which they hire in a frictional market modelled by a directed search approach, and capital which they rent period-by-period. First, I show that the interaction of search and financial frictions slows down the reallocation of labour and capital from low productivity to high productivity firms and therefore prolongs the recession following a financial shock. Second, I find that the credit tightening reduces the net employment of large and productive firms more than small and unproductive firms, consistent with recent empirical findings.Third, I find that the introduction of financial frictions enhances the ability of the model to explain the fluctuation and persistence observed in output and labour market flows during the great recession. In fact, the model can account for 50% of the increase in unemployment during the 2008-2010 recession.
Wealth and Inequality in Turbulent Labour Markets (draft coming soon)
joint with Isaac Baley (UPF)
This paper investigates the impact of turbulence risk on the labour market outcomes in the presence of imperfect financial markets and search frictions. First, in our empirical analysis we document the joint impact of turbulence and wealth on re-employment wages and unemployment duration. Second, we build a tractable dynamic heterogenous agents model with imperfect financial markets and uninsurable risk of turbulence and job finding. We calibrate our model to the US economy and show that the presence of turbulence risk affects job finding decision of workers through its impact on the pre-cautionary saving. In the presence of partial insurance, turbulent workers pre-cautionary job search is less sensitive to the asset depletion during unemployment compared to non-turbulent workers. Third, we evaluate the welfare effects of change in turbulence risk and a tax-financed unemployment insurance (UI) scheme. We find that although the welfare effects are heterogenous across the distribution of workers however, rise in risk of turbulence is welfare decreasing while increase in UI is welfare increasing.
Firm-Level Debt and Employment
joint with Mikael Carlsson (Uppsala Univeristy) and Oskar Skans (Uppsala University)
Multidimensional sorting with imperfect financial markets
joint with Jan Eeckhout (UCL/UPF) and Peter Spital (UCL)
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