Essays on the Macroeconomics of Labor Markets

Abstract

This thesis contributes to the study of firms and labor markets in macroeconomics. The first two chapters argue that analyzing how workers with varied skills are organized in production – opening the “black box” of firms – provides new insights about macroeconomic outcomes and trends. The first chapter develops an analytically tractable theory of team production and formation. The second chapter demonstrates how to empirically discipline this model using micro data and shows that it explains why firms play a prominent role in the rise of wage inequality observed in Germany over recent decades. The final, co-authored chapter focuses on the business-cycle dynamics of labor markets and examines how firms’ behavioral adjustments to uncertainty shocks transmit to aggregate unemployment. The first chapter formulates a tractable theory of the firm as a “team assembly” technology. Most production processes are too complex for any one individual to know how to perform all required tasks well, so firms assemble groups of workers with specialized skills. Workers evidently differ also in their level of talent and the most successful firms appear to employ the most talented employees. I formulate a theory that parsimoniously captures and connects these observations. I show that an important feature of team production are complementarities across coworkers’ talents: the marginal contribution of one employee’s talent to output is higher when matched with other talented workers. This creates an incentive for positive assortative matching based on talent. While search frictions prevent perfect sorting, deepening skill specialization reinforces complementarities, leading to an equilibrium in which some firms have “superstar teams” of talented workers, while other firms employ less productive workforces. The second chapter is a quantitative application of the theory developed in the first chapter, showing that this model helps explain the so-called "firming up of inequality": most of the rise in wage inequality in advanced economies since the 1980s has occurred between, rather than within, firms. Suggestive evidence indicates that skill specialization has intensified since the mid-1980s. I develop a theory-guided strategy for inferring the strength of coworker talent complementarities from matched employer-employee data on wages and labor market histories. Applying this method to administrative panel data for Germany, I find that complementarities as well as talent sorting have strengthened since the mid-1980s, aligned with the theory’s predictions. According to exercises conducted using an estimated version of the model, this mechanism explains a quantitatively significant share of the observed increase in the between-firm share of wage inequality. It also contributes to elevated firm-level productivity dispersion. The third chapter – which is based on joint work with Wouter Den Haan and Pontus Rendahl published in the Journal of Monetary Economics – examines how shifts in firms’ demand for labor due to aggregate uncertainty shocks affect unemployment at business-cycle frequency. Empirically, unemployment tends to worsen in times of heightened economic uncertainty. One possible explanation is that uncertainty may raise firms’ option value of adopting a “wait and see” approach compared to posting vacancies. This mechanism is intuitively appealing, influential in the literature, and commonly viewed as having been formalized in the canonical search-and-matching model. Our first contribution is to prove that option-value effects actually play no role in the standard model. As this model assumes free entry, the expected value of vacancy posting is, and will always remain, zero. Hence, there is no point in waiting. Second, and constructively, we show that 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. The paper thus reconciles common intuitions, theory, and evidence about the labor market effects of uncertainty shocks.