The neoclassical growth model assumes fixed labor supply and
competitive labor markets. Is it harmless to ignore
monopsonistic power in the neoclassical growth model?
The paper argues that it is not, especially if a growth
model needs to be consistent with the long-run dynamics of the
labor share. This paper solves a minimalist growth model
with monopsonistic power at the firm level and two production
technologies with different degrees of efficiency. The paper
shows that monopsonistic power by the representative
firm implies either a ``level" or a
``growth" effect in the determination of the labor
share. If the two sectors feature unbalanced growth, the
economy converges to a an asymptotic balanced growth in which
the labor share asymptotically decline, in line with
secular evidence on labor share dynamics. The paper shows also
that the monopsonistic equilibrium has sizeable
``misallocative" effects, since it implies the use of less
efficient technologies that are not used by the optimal growth
problem. Finally, the paper shows that the
negative welfare effect of monopsony is larger when the
model accounts for endogenous labor supply as the
redistribution from wages to profits induces a reduction in
hours worked. The generalized model is also consistent with
recent evidence on balanced growth with declining labor
supply.
Flexible work arrangements are increasingly common in many
countries, as they allow for quick adjustments in labor
demand. These arrangements are also thought to discourage
undeclared work, although the evidence is mostly
correlational. Using Italian administrative data on labor
vouchers and randomly timed labor inspections, this study
demonstrates that flexible work arrangements actually disrupt
the work of labor inspectors, leading to more undeclared work
rather than less. Firms using flexible work arrangements to
hide undeclared work tend to hire more regular part-time and
fixed-term workers and are more likely to be fined by labor
inspectors when vouchers are abolished. A simple partial
equilibrium labor demand model rationalizes these findings.
We study two first-order economic
consequences of vertical mismatch, using a simple
(neoclassical) model of under- and over-employment.
Individuals of high type can
perform both skilled and unskilled jobs, but only a
fraction of low-type workers can
perform skilled jobs. People have different costs over
these jobs. First, we calibrate
the model to match US CPS time-series since the 1980s.
To control for unobserved
heterogeneity, we compute wages based on workers who
have switched between skilled
and unskilled jobs. We show that changes in
educational mismatch has contributed
one-sixth as much as skilled-bias technological
progress for the rise in the college pre-
mium. Second, we calibrate the model to match moments
of 50 US states, to measure
the output costs of frictions generating mismatch. The
cost of frictions is 0.26% of
output on average but varies between 0.06% to 0.77%
across states. The key variable
that explains the output cost of vertical mismatch is
not the percentage of mismatched
workers but their wage relative to well-matched
workers.
Temporary
employment has spiked in OECD countries over the last 40
years and is
now a common feature of their labor market landscape. A
large body of empirical
literature examines the spread of temporary employment,
but no systematic review
and interpretation of its findings in light of economic
theory exists. This survey aims
at filling this gap by interpreting the key empirical
results based on the predictions of
the macro models in markets with frictions developed to
address specific features of
temporary employment. Revisions of workhorse models used
so far to analyze tempo-
rary employment are also suggested. (JEL J22, J31, J41, J81, J83, K31)
We discuss the connections between
epidemiology models and search and
matching (SAM) approach and draw conclusions about
modeling the
trade-offs between lockdowns and disease spread. We
review the pre-COVID
epidemics literature, which was mainly by
epidemiologists, and the post-
COVID surge in economics papers that use meeting
technologies to model the
trade-offs. We argue that modeling the decentralized
equilibrium with eco-
nomic trade-offs gives rise to substantially different
results from the earlier
epidemics literature, but policy action is still
welfare-improving because of
several externalities.
After falling for
four decades, statutory retirement ages are increasing
in most OECD countries. The labor market adjustment to
these reforms has not yet been thoroughly investigated
by the literature. We draw on a major pension reform
that took place in Italy in December 2011, increasing
the retirement age by up to six years for some
categories of workers. We have access to a unique
dataset validated by the Italian social security
administration (INPS), which identifies in each
private firm, based on an administrative exam of
eligibility conditions, how many workers were locked
in by the sudden increase in the retirement age, and
for how long. We find that firms mostly affected by
the lock in are those that were downsizing even before
the pol- icy shock. The increase in the retirement age
seems to displace more the middle-aged than the young
workers. Furthermore there is not a one-to-one
increase in the number of older workers in the firms
where some workers were locked in by the reform. We
provide tentative explanations for these results,
based on the interaction between retirement,
employment protection legislation and liquidity
constraints of firms.
The paper previously circulated with different titles: A
Clash of Generations? Increase in Retirement Age and Labor
Demand for Youth , INPS Working Paper Number 1 and
Closing the Retirement Door and the Lump of Labor
In an optimizing model of epidemics
several externalities arise when agents shield to
avoid infection. Optimizing behaviour delays herd
immunity but also reduces overall infections to
approximately the minimum consistent with herd
immunity. For reasonable parameter values, and with no
vaccine, we find that agents delay too much because of
a rat race to shield: they shield too much in the hope
that others catch the disease and reach herd immunity.
This and other externalities drive large wedges
between private and social outcomes. The expectation
of a vaccine reverses the effects, and agents shield
too little.
Since
the outbreak of the covid-19 pandemic economists have
turned to the SIR model and its subsequent variants for
the study of the pandemic’s economic impact. But the SIR
model is lacking the optimizing behaviour of economic
models, in which agents can influence future transitions
with their present ac- tions. We borrow ideas and
modelling techniques from the Mortensen-Pissarides
(1994) search and matching model and show that there is
a well-defined solution in line with the original claims
of Kermack and McKendrick (1927) but in which incentives
play a role in determining the transitions. There are
also externalities that justify government intervention
in the form of imposing more restrictions on actions
outside the home than a decentralized equilibrium would
yield
Public Employment Redux (2020),
with Pedro Gomes and Thepthida Sopraseuth, published in Journal
of Government and Economics, Vol. 1
Abstract
The public sector hires
disproportionately more educated workers. Using
US mi- crodata, we show that the education bias
also holds within industries and in two thirds
of 3-digit occupations. To rationalize this
finding, we propose a model of private and
public employment based on two features. First,
alongside a perfectly competitive private
sector, a cost-minimizing government acts with a
wage schedule that does not equate supply and
demand. Second, our economy features
heterogeneity across indi- viduals and jobs, and
a simple sorting mechanism that generates
underemployment – educated workers performing
unskilled jobs. The equilibrium model is
parsimonious and is calibrated to match key
moments of the US public and private sectors. We
find that the public-sector wage differential
and excess underemployment account for 15
percent of the education bias, with the
remaining accounted for by technology. In a
counterintuitive fashion, we find that more wage
compression in the public sector raises
inequality in the private sector. A 1 percent
increase in unskilled public wages raises
private-sector inequality by 0.13 percent.
We propose a simple theory of under- and
over-employment. Individuals of high type can perform
both skilled and unskilled jobs, but only a fraction
of low-type workers can perform skilled jobs. People
have different non-pecuniary values over these jobs,
akin to a Roy model. We calibrate two versions of the
model to match moments of 17 OECD economies,
considering separately education and skills mismatch.
The cost of mismatch is 3% of output on average but
varies between -1% to 9% across countries. The key
variable that explains the output cost of mismatch is
not the percentage of mismatched workers but their
wage relative to well-matched workers.
The Italian Jobs Act introduced a subsidy for
new hirings as well as a new open ended labor contract based
on graded security, with severance payments increasing with
tenure, while phasing out the compulsory reinstatement of
workers in the case of unfair dismissals applied until March
2015. Simple models of job creation and destruction
predict that hiring subsidies and lower firing costs
unambiguously increase hirings. Moreover, lower firing
costs associated with graded security should also increase
layoffs. These effects need not to be uniform across the size
distribution of firms, especially when firms of different size
are treated differently by the policy changes as in the case
of the Jobs Act. On the one hand, the hiring subsidy was
proportional to wages, but had a cap, hence was more generous
for small firms- typically paying lower wages than large firms
- making them particularly responsive along the job creation
margin. On the other hand, the reduction in firing costs
applied mainly to large firms concentrating on them the
adjustment along the job destruction margin. To
investigate empirically the effects of the Italian Jobs
Act, we draw on a unique dataset covering the universe of
private firms in Italy having at least once 10 to 20 employees
in the two years prior to the reform of January 2015.
We find evidence of a substantial increase in open ended
hirings, and in the transformation of fixed-term into open
ended contracts, in the aftermath of the Jobs Act. The
effects of the Jobs Act on firings- conversely- are much
smaller, and are concentrated on large firms, while small
firms react more intensively- creating new open ended
contracts- to the hiring subsidy.
History is a key subject in most educational
system in Western countries, and there is ongoing concern
about the degree of historical knowledge and historical
sensibility that students obtain after their high school
graduation. This paper proposes a simple linetime test for
quantitatively measuring a human sense of history. The paper
reports the results of the test administered to approximately
250 Italian university students. There are two empirical
results. First, students have remarkable difficulties in
ordering basic events over the time line, with the largest
mistakes observed around the events that took place in the
Middle Age. Second, the paper uncovers a statistical
regularity in the test performance across gender, with female
subjects featuring a statistical significant and
quantitatively sizable downward score. The gender difference
is surprising, since existing literature on differences in
cognitive abilities across gender suggests that female
subjects outperform male subjects in memory related tests. The
paper shows also that the gender difference survives to a
variety of sub periods, and falls by only 20 percent when we
distinguish between violent and non violent events
Abstract
A key lesson from the Great Recession is that firms’ leverage
and access to finance are important for hiring and firing
decisions. It is now empirically established that bank lending
is correlated with employment losses when credit conditions
deteriorate. We provide further evidence of this and make
causal inferences on the effect of leverage on job losses
drawing on a new firm-level dataset that we assembled on
employment and financial positions of European firms. Yet, in
the Diamond Mortensen Pissarides (DMP) model there is no role
for finance. All projects that display positive net present
values are realized and financial markets are assumed to be
perfect. What if financial markets are not perfect? Does a
different access to finance influence the firm’s hiring and
firing decisions? The paper uses the concept of limited
pledgeability proposed by Holmstrom and Tirole to integrate
financial imperfections and labor market imperfections. A
negative shock wipes out the firm’s physical capital and leads
to job destruction unless internal cash was accu- mulated by
firms. If firms hold liquid assets they may thus protect their
search capital, defined as the cost of attracting and hiring
workers. The paper explores the trade-off between size and
precautionary cash holdings in both partial and general
equilibrium. We find that if labor market frictions disappear,
so does the motive for firms to hold liquidity. This suggests
a fundamental complementarity between labor market frictions
and holding of liquid assets by firms.
Inside Severance Pay,
(2016) with Tito Boeri and Espen Moen. Journal of
Public Economics.,
Volume 145, January, Pages 211-225
Abstract
All OECD countries have either legally
mandated severance pay or compensations imposed by
industry-level bargaining in case of employer initiated
job separations. According to the extensive literature
on Employment Protection Legislation (EPL), such
transfers are either ineffective or less efficient than
unemployment benefits in providing insurance against
labor market risk. In this paper we show that mandatory
severance is optimal in presence of wage deferrals
motivated by deterrence of opportunistic behavior of
workers. Our results hold under risk neutrality and in
general equilibrium. We also establish a link between
optimal severance and efficiency of the legal system and
we characterize the effects of shifting the burden of
proof from the employer to the worker. Our model
accounts for two neglected features of EPL. The first is
the discretion of judges in interpreting the law, which
relates not only to the decision as to whether the
dismissal is deemed fair or unfair, but also to the
nature, economic vs. disciplinary, of the layoff. The
second feature is that compensation for dismissal is
generally increasing with tenure. The model also
rationalizes why severance is generally higher in
countries with less efficient judicial systems and why
small firms are typically exempted from the strictest
EPL provisions.
Abstract.
Financial market shocks and imperfections,
alongside productivity shocks, represent both an impulse
and a propagation mechanism of aggregate fluctuations.
When labor and financial markets are imperfect, firms'
funding and leverage respond to productivity changes.
Models of business cycle with equilibrium unemployment
largely ignore financial imperfections. The paper
proposes and solves a tractable equilibrium unemployment
model with imperfections in two markets. Labor market
frictions are modeled via a traditional Diamond
Mortensen Pissarides (DMP) model with wage positing.
Financial market imperfections are modeled in terms of
limited pledgeability, in line with the work of
Holmstrom and Tirole. We show analytically that
borrowing constraints increase unemployment volatility
in the aftermath of productivity shocks. We calibrate
the model to match key labor and financial moments of
the US labor markets, and we perform two quantitative
exercises. In the first exercise we ask whether the
interaction between productivity shocks and borrowing
constraints increase the volatility of unemployment with
respect to models that focus only on the labor market
imperfections. In the general specification of the
model, both leverage and non pledgeable income move with
the cycle. Our calibration exercise shows that the
volatility of unemployment in response to productivity
shock increases by as much as 50 percent with respect to
a pure DMP model with wage posting. The second
quantitative exercise explores the role of pure
financial shocks on aggregate equilibrium. We calibrate
pledgeability shocks to match the frequency of financial
crisis and define financial distress as a situation in
which internal liquidity completely dries up. The second
exercise shows that full dry up of internal liquidity
implies an increase in unemployment as large as 60
percent. These results throw new light on the aggregate
impact of financial recessions.
Dismissal Disputes and Endogenous Sorting, (2015) with
Gerard Pfann
Cepr Discussion Paper, IZA Discussion Paper, CES-Ifo
Discussion Paper, forthcoming.
Abstract.
A dismissal dispute is a difference
between an employer and an employee that prevents
agreement on work contract termination. Disputed
employer initiated separations often lead to costly and
lengthy job termination processes. Such disputes can
have various forms, as emphasized by the law practice
and by country specific legislation. Many relevant and
important questions can be asked. How shall we model and
classify disputes? How do different grounds for contract
terminations sort among different types of disputes? How
long and how costly are dismissal disputes? Do courts
and other third party institutions respond differently
to different disputes? Yet, the economics of dismissal
disputes is surprisingly silent. This paper is an
attempt to partly fill this gap. Theoretically, the
paper proposes a simple accounting framework that is
coherent with general dismissal legislation.
Empirically, it has access to more than 2000 dismissal
disputes that took place in the Netherlands between 2006
and 2009. The data set records dispute level information
on both the employer and the employee engaged in the
controversy, including firm and worker characteristics,
the reason of the dispute, the process duration, the
decision, and the associated costs. In addition, the
paper models the trade off between a lengthy bureacratic
dismissal procedure via the Public Employment Service
and a costly court ruling, as typically faced by Dutch
firms. The model rationalizes the sorting of disputes
among the two institutions and helps understanding the
longevity of the Dutch model and its political
resilience. Finally, it highlights how different
institutions act differently in the face of dismissal
conflicts. Such a phenomenon is clearly observed in the
real life data.
Graded Security From Theory Practice: with Tito Boeri and
Espen Moen
Competitive On
the Job Search, (2016) with Espen Moen and Dag Einar
Sommervoll. Published in the Review of Economic
Dynamics, special issue in honour of Dale
Mortensen.
Abstract:
The paper proposes a model of on-the-job
search and industry dynamics in which search is
directed. Firms permanently differ in productivity
levels, their production function features constant
returns to scale, and search costs are convex in search
intensity. Wages are determined in a competitive manner,
as firms advertise wage contracts (expected discounted
incomes) so as to balance wage costs and search costs
(queue length). An important assumption is that a firm
is able to sort out its coordination problems with its
employees in such a way that the on-the-job search
behavior of workers maximizes the match surplus. Our
model has several novel features. First, it is close in
spirit to the competitive model, with a tractable and
unique equilibrium, and is therefore useful for
empirical testing. Second, the resulting equilibrium
gives rise to an efficient allocation of resources.
Third, the equilibrium is characterized by a job ladder,
where unemployed workers apply to low-productivity firms
offering low wages, and then gradually move on to more
productive, higher-paying firms. Finally, the
equilibrium offers different implications for the
dynamics of job-to-job transitions than existing models
of random search.