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Labor Markets and the Macroeconomy

Paper Session

Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)

Hilton Riverside, Chart B
Hosted By: American Economic Association
  • Chair: Matthew Larsen, Lafayette College

The Dynamics of Firm-Level Pay: Theory and Evidence from Portugal

Rui Castro
McGill University
Gian Luca Clementi
New York University


Recent empirical work has emphasized the role played by firms in shaping earnings inequality. In this paper, we build a tractable model of firm-pay heterogeneity, by introducing labor market's monopsonistic power in a Hopenhayn-style firm dynamics framework. The model naturally generates wage-size premia. We use our theory to help understand the dynamics of earnings inequality in Portugal. Like in other developed economies, earnings inequality in Portugal has increased sharply from the mid-1980s until the mid-1990s. However, it has been steeply decreasing ever since. We trace this unique dynamics to firm-level changes. The sole factor pushing inequality downwards has been a larger compression in firm pay, mostly driven by a decline in the pass-through from firm-level productivity to wages. Our model suggests that a decrease in firms' labor market power may have been a chief determinant of such decline.

The Distributional Impact of the Minimum Wage in the Short and Long Run

Erik Hurst
University of Chicago
Patrick Kehoe
Stanford University
Elena Pastorino
Hoover Institution and Stanford University
Thomas Winberry
University of Pennsylvania


We develop a framework with worker heterogeneity, monopsony power, and putty-clay technology in order to study the distributional impact of the minimum wage in the short and long run. We discipline our model to match the small employment effects of the minimum wage in the short run and the large estimated elasticities of substitution across different workers in the long run. We find that in the short run, both small and large increases in the minimum wage have small impacts on employment and increase the labor income of the workers earning less than the new minimum. In the long run, the effects of the minimum wage greatly differ depending on the size of its increase: a small increase has a beneficial long-run impact on low-income workers in that it increases their employment, income, and welfare, whereas a large increase reduces the employment, income, and welfare of precisely the low-income workers it is meant to support. In either case, these long-run effects take time to fully materialize because firms slowly adjust their mix of inputs. Existing transfer programs, such as the earned-income tax credit (EITC) or a progressive tax system, are more effective than large increases in the minimum wage at improving long-run outcomes for workers at the low end of the wage distribution. But combining existing programs with a small increase in the minimum wage provides even larger welfare gains for those workers.

The Dual U.S. Labor Market Uncovered

Hie Joo Ahn
Federal Reserve Board
Bart Hobijn
Arizona State University and Federal Reserve Bank of San Francisco
Aysegul Sahin
University of Texas-Austin


Aggregate U.S. labor market dynamics are well approximated by a dual labor market supplemented with a third home-production segment. We estimate a Hidden Markov Model with (in-)equality restrictions, a machine-learning method, to uncover this structure in which the different market segments are identified through inequality constraints on labor market transition probabilities. This method yields time series of stocks and flows for the three labor market segments for 1980-2021. Primary sector workers, who make up around 55 percent of the population, are almost always employed and rarely experience unemployment. The secondary sector, which constitutes only 14 percent of the population absorbs most of the short-run fluctuations in the labor market, both at seasonal and business cycle frequencies. Workers in this segment experience 6 times higher turnover rates than those in the primary tier and are 10 times more likely to be unemployed than their primary counterparts. The tertiary segment consists of workers who infrequently
participate in the labor market but nevertheless experience unemployment when they try to enter the labor force. While we find that young workers, racial minorities, and workers with lower educational attainment are more likely to belong to the secondary sector, the bulk of labor market segment variation across individuals cannot be explained by observables. Our findings imply that aggregate stabilization policies, such as monetary policy, predominantly works through the small but turbulent secondary market.

A New Claims-Based Unemployment Dataset: Application to Postwar Recoveries Across U.S. States

Andrew Fieldhouse
Texas A&M University
David Munro
Middlebury College
Christoffer Koch
International Monetary Fund
Sean Howard
Wood Mackenzie


Using newly digitized unemployment insurance claims data we construct a historical monthly unemployment series for U.S. states going back to January 1947. The constructed series are highly correlated with the Bureau of Labor Statics' state-level unemployment data, which are only available from January 1976 onwards, and capture consistent patterns in the business cycle. We use our claims-based unemployment series to examine the evolving pace of post-war unemployment recoveries at the state level. We find that faster recoveries are associated with greater heterogeneity in the recovery rate of unemployment and slower recoveries tend to be more uniformly paced across states. In addition, we find that the pace of unemployment recoveries is strongly correlated with a states’ manufacturing share of output.

Vacancy Posting, Firm Balance Sheets, and Pandemic Policy Interventions

David Van Dijcke
University of Michigan
Marcus Buckmann
Bank of England
Arthur Turrell
UK Office for National Statistics
Tom Key
Bank of England


We assess how firm balance sheets propagated labour demand shocks during the COVID-19
pandemic using novel matched data on firms and online job postings. By exploiting
regional variation in the UK’s lockdown restrictions and Eat Out to Help Out policy, and
firm-level variation in loan disbursement under the Bounce Back Loan Scheme, we find
that less leveraged firms increased vacancy postings more strongly in response to positive
demand shocks, while only firms with healthier pre-pandemic balance sheets increased
vacancies after receiving a loan. These findings complement the link between leverage and
greater employment losses in response to negative demand shocks in the corporate finance
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy