Essays on Labor Heterogeneity and Macroeconomics.

Abstract

This dissertation is comprised of three essays that examine various aspects of macroeconomics linked to labor economics. The first essay develops an understanding of how, in addition to search frictions, labor heterogeneity can influence aggregate labor-market fluctuations, and, in particular, the cyclical behavior of aggregate unemployment. Heterogeneity is captured by considering a labor force in which individuals have a comparative advantage in a particular job, yet are still able to work in jobs in which they are at a comparative disadvantage. Within this context, firms' match-quality expectations are slow moving, which results in it being the case that in an expansion the ratio of aggregate vacancies to unemployment will exhibit a stage of sluggish adjustment. This is a key feature of the data that the standard, homogenous-agent model of equilibrium unemployment cannot account for. The second essay, which is co-written with Miles S. Kimball, examines the long-run macroeconomic consequences of changes in on-the-job utility. One important implication of secular improvements in on-the-job utility is that it is possible for work hours to remain relatively trendless over time even if the income effect of higher wages on labor supply exceeds the substitution effect of higher wages. Another important implication is that such secular improvements can themselves be a substantial component of the welfare gains from technological progress. These two implications are connected by an identity: improvements in on-the-job utility that have a significant effect on labor supply tend to have large welfare effects. The third essay, which is co-written with Shanthi P. Ramnath, re-examines the ability of the standard neoclassical macroeconomic model augmented with taxes to match the trend behavior of hours per population (H/P) across countries. This essay presents evidence that the failure of this model to accurately predict H/P in certain countries stems from an inherent inability of the model to account for changes in the employment-to-population ratio (E/P). This implies a surprising result, which is that a substantial fraction of the labor wedge, which captures the extent to which the standard model fails to predict H/P, consists of E/P itself.