Job Market Paper
Abstract. Recent studies attribute the rise in wage inequality primarily to widening pay disparities between rather than within firms. I develop a novel theory to quantitatively explain this fact. The theory has three core features: production takes place in teams; workers are heterogeneous in talent and specialized in specific tasks; and labor markets are frictional. Specialization endogenously generates coworker complementarity: more talented workers gain more from talented colleagues. This creates an incentive for assortative matching and thereby fosters dispersion in average wages across firms, though search frictions prevent perfect sorting in equilibrium. Using German administrative panel data, and interpreting firms as teams, I measure complementarities, validate key mechanisms, and structurally estimate the model. I argue that specialization has strengthened since the mid-1980s, and show that coworker complementarities and talent sorting have intensified concurrently. According to a model exercises, this explains ~40% of the observed increase in the between-firm share of wage inequality, and contributed to higher firm-level productivity dispersion. Rising complementarities have also worsened aggregate output costs from coworker mismatch, but increased sorting partly mitigated this effect.
The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation, with H. Lee and P. Rendahl
Review of Economic Dynamics, forthcoming
Abstract. This paper studies the role of macroeconomic uncertainty in a search-and-matching framework with risk-averse households. Heightened uncertainty about future productivity reduces current economic activity even in the absence of nominal rigidities. A risk-premium mechanism accounts for this result. As future asset prices become more volatile and covary more positively with aggregate consumption, the risk premium rises in the present. The associated downward pressure on current asset values lowers firm entry, making it harder for workers to find jobs and reducing supply. With nominal rigidities the recession is exacerbated, as a more uncertain future reinforces households’ precautionary behavior, which causes demand to contract. Counterfactual analyses using a calibrated model imply that unemployment would rise by less than half as much absent the risk-premium channel. The presence of this mechanism implies that uncertainty shocks are less deflationary than regular demand shocks, nor can they be fully neutralized by monetary policy.
Volatile Hiring: Uncertainty in Search and Matching Models, with W. Den Haan and P. Rendahl
Journal of Monetary Economics, Vol. 123 pp. 1-18 (2021)
Abstract. In search-and-matching models, the nonlinear nature of search frictions increases average unemployment rates during periods with higher volatility. These frictions are not, however, by themselves sufficient to raise unemployment following an increase in perceived uncertainty; though they may do so in conjunction with the common assumption of wages being determined by Nash bargaining. Importantly, option-value considerations play no role in the standard model with free entry. In contrast, when the mass of entrepreneurs is finite and there is heterogeneity in firm-specific productivity, a rise in perceived uncertainty robustly increases the option value of waiting and reduces job creation.
Workers, Capitalists, and the Government: Fiscal Policy and Income (Re)Distribution, with C. Cantore
Journal of Monetary Economics, Vol. 119 pp. 58-74 (2021)
Abstract. We propose a novel two-agent New Keynesian model to study the interaction of fiscal policy and household heterogeneity in a tractable environment. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model is consistent with micro data on empirical intertemporal marginal propensities to consume, and it avoids implausible profit income effects on labor supply. Relative to the traditional two-agent model, these features imply, respectively, a lower sensitivity of consumption to the composition of public financing; and smaller fiscal multipliers alongside pronounced redistributive effects.