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Financial Frictions and Occupational Mobility
Abstract
We study the effects of financial market incompleteness on occupational mobility. Incomplete insurance not only generates an increase in consumption volatility, but also reduces occupational mobility. The correlation of labor supply with occupational productivity is lower than under complete markets. Low-asset workers remain in low-productivity occupations even when the expected value of switching is positive. Negative occupational productivity shocks therefore have larger effects on such workers' future earnings than they would for better insured workers. In a calibrated model, we find that the welfare costs of market incompleteness can be as large as 12 percent of lifetime consumption.
... An increase in utility during unemployment could also increase wages if unemployment is considered as the outside option in wage bargaining (Caldwell and Harmon (2019)), although Jäger et al. (2020) show empirically that the value of nonemployment has a much smaller effect on wages than predicted by the Nash bargaining model. An alternative, yet not mutually exclusive, class of models examines the relationship between workers' job mobility and market incompleteness (Hawkins and Mustre-del-Rio ((2016)), Cubas and Silos (2020)). Since job switching is often associated with more volatile earnings and higher unemployment risks, workers who are less credit-constrained are more likely to switch to better occupations and jobs when facing adverse shocks. ...
We study the causal effect of liquidity constraints on individual labor market outcomes by exploiting the 1992 mortgage reform in Denmark, which for the first time allowed homeowners to borrow against housing equity for nonhousing purposes. Following the reform, liquidity‐constrained homeowners increased debt levels and had higher earnings growth and lower employment rates. The option to borrow against housing equity enabled liquidity‐constrained individuals to move to high‐wage jobs and invest in valuable human and physical capital. The results imply that relaxing household liquidity constraints during recessions can create better job matches, potentially increasing earnings and output in the longer run.
This paper studies how insurance from progressive taxation improves the matching of workers to occupations. We propose an equilibrium dynamic assignment model to illustrate how social insurance encourages mobility. Workers experiment to find their best occupational fit in a process filled with uncertainty. Risk aversion and limited earnings insurance induce workers to remain in unfitting occupations. We estimate the model using microdata from the United States and Germany. Higher earnings uncertainty explains the U.S. higher mobility rate. When workers in the United States enjoy Germany's higher progressivity, mobility rises. Output and welfare gains are large. This article is protected by copyright. All rights reserved
Do …nancial constraints have persistent e¤ects on the creation of busi-nesses, or should we expect that forward-looking individuals always save their way out of credit constraints? This paper studies the interaction between savings and the decision to become an entrepreneur in a multi-period model with borrowing constraints to answer this question. The model has a simple threshold property: able individuals who start with wealth above a threshold save to become entrepreneurs, while those who start below this threshold remain wage earners forever. The threshold wealth such that able entrepreneurs …nd it bene…cial to save decreases with entrepreneurial ability, i.e., the magniture of individual poverty traps de-creases with entrepreneurial ability. Still, calibrated examples show that the magnitude of individual poverty traps can be large, specially if returns to scale are calibrated to be large.
Policy makers view public sector-sponsored employment and training programs and other active labor market policies as tools for integrating the unemployed and economically disadvantaged into the work force. Few public sector programs have received such intensive scrutiny, and been subjected to so many different evaluation strategies. This chapter examines the impacts of active labor market policies, such as job training, job search assistance, and job subsidies, and the methods used to evaluate their effectiveness. Previous evaluations of policies in OECD countries indicate that these programs usually have at best a modest impact on participants' labor market prospects. But at the same time, they also indicate that there is considerable heterogeneity in the impact of these programs. For some groups, a compelling case can be made that these policies generate high rates of return, while for other groups these policies have had no impact and may have been harmful. Our discussion of the methods used to evaluate these policies has more general interest. We believe that the same issues arise generally in the social sciences and are no easier to address elsewhere. As a result, a major focus of this chapter is on the methodological lessons learned from evaluating these programs. One of the most important of these lessons is that there is no inherent method of choice for conducting program evaluations. The choice between experimental and non-experimental methods or among alternative econometric estimators should be guided by the underlying economic models, the available data, and the questions being addressed. Too much emphasis has been placed on formulating alternative econometric methods for correcting for selection bias and too little given to the quality of the underlying data. Although it is expensive, obtaining better data is the only way to solve the evaluation problem in a convincing way. However, better data are not synonymous with social experiments.
Resource misallocation can lower aggregate total factor productivity (TFP). We use microdata on manufacturing establishments
to quantify the potential extent of misallocation in China and India versus the United States. We measure sizable gaps in
marginal products of labor and capital across plants within narrowly defined industries in China and India compared with the
United States. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed
in the United States, we calculate manufacturing TFP gains of 30%–50% in China and 40%–60%.in India.
This paper develops a theory of job matching in which matching information has both job-specific and occupation-specific components. If occupational matching is significant, then the theory predicts that, for those who have switched jobs but remained in the same occupation, increased tenure in the previous job lowers the likelihood of separation from the current job. These predictions are tested using job tenure data from the National Longitudinal Survey's youth cohort. In general, the data are consistent with the occupational matching hypothesis. Copyright 1990 by University of Chicago Press.
In this paper, we exploit establishment-level data to examine the relationship between microeconomic productivity dynamics and aggregate productivity growth. After synthesizing the evidence from recent studies, we conduct our own analysis using establishment-level data for U.S. manufacturing establishments as well for selected service industries. The use of longitudinal micro data on service sector establishments is one of the novel features of our analysis. Our main findings are summarized as follows: (i) the contribution of reallocation of outputs and inputs from less productive to more productive establishments plays a significant role in accounting for aggregate productivity growth; (ii) for the selected service industries considered, the contribution of net entry (more productive entering establishments displacing less productive exiting establishments) is dominant; (iii) the contribution of net entry to aggregate productivity growth is disproportionate and is increasing in the horizon over which the changes are measured since longer horizon yields greater differentials from selection and learning effects; (iv) the contribution of reallocation to aggregate productivity growth varies over time (e.g. is cyclically sensitive) and industries and is somewhat sensitive to subtle differences in measurement and decomposition methodologies.
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate.
In this article, I present structural estimates of a search model that flexibly incorporates general human capital accumulation along with career and firm choice, where a career is empirically identified as a combination of industry and occupation. I use these estimates to empirically distinguish between the relative importance of various factors for generating wage growth over the life cycle. Evidence presented in the article highlights the importance of considering the two-stage search process that originates from the model. In particular, I demonstrate that previous instrumental variables methods dramatically underestimate the importance of firm-specific matches for wage growth.
We study the welfare cost of market incompleteness in a generalized Bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks. Market incompleteness in our framework has two dimensions. First, in the Bewley tradition, only a limited set of instruments for consumption smoothing is available. Second, entrepreneurs[modifier letter apostrophe] capital rental is subject to collateral constraints. As is well known, it is harder to self-insure against more persistent shocks, and the welfare cost of missing consumption insurance increases with shock persistence. On the other hand, with collateral constraints, an increase in shock persistence leads to better allocation of production factors through entrepreneurs[modifier letter apostrophe] self-financing, and the welfare cost of imperfect capital rental markets decreases with shock persistence. The overall welfare cost of market incompleteness can be increasing, decreasing, or even non-monotone in shock persistence, depending on the relative strengths of its two components--the cost of missing insurance and the cost of imperfect capital markets.
Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659–684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385–403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor.
Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, this paper provides an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. The analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers. Welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk or, alternatively, in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.
This paper examines entrepreneurship in order to analyze, first, the degree to which the opportunity to start or own a business affects the household's saving behavior and the implication of this behavior for the distribution of wealth and, second, the relationship between the extent of entrepreneurship in the economy and socioeconomic mobility, that is, the movement of families across wealth classes over time.First, a number of stylized facts based on data from the Panel Study of Income Dynamics and the Survey of Consumer Finances are outlined. They show relevant differences in asset holdings and wealth mobility between entrepreneurs and workers. Second, a dynamic general equilibrium model with an explicit formalization of the entrepreneurial choice is developed. Through the modeling of the entrepreneurial activities, the model generates a concentration of wealth similar to the one observed in the U.S. economy and it replicates the main patterns of wealth mobility in which entrepreneurs experience higher upward mobility than workers. Journal of Economic Literature Classification Numbers: E21, D31, J23
Why has the average real risk-free interest rate been less than one percent? The question is motivated by the failure of a class of calibrated representative-agent economies to explain the average return to equity and risk-free debt. I construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk-free asset. I calibrate the economy and characterize equilibria computationally. With a borrowing constraint of one year's income, the resulting risk-free rate is more than one percent below the rate in the comparable representative-agent economy.
This chapter presents a framework for understanding changes in the wage structure and overall earnings inequality. The framework emphasizes the role of supply and demand factors and the interaction of market forces and labor market institutions. Recent changes in the US wage structure are analyzed in detail to highlight crucial measurement issues that arise in studying wage structure changes and to illustrate the operation of the supply-demand-institution framework. The roles of skill-biased technological change, globalization forces, changes in demographics and relative skill supplies, industry labor rents, unions, and the minimum wage in the evolution of the US wage structure are examined. Recent wage structure changes are placed in a longer-term historical perspective, and differences and similarities in wage structure changes among OECD nations are assessed.
Using data from the National Longitudinal Survey of Youth (1979-96) and the Panel Study of Income Dynamics (1981-91), I seek to determine whether there is any net positive return to tenure with the current employer once we control for industry-specific capital. Including total experience in the industry as an additional explanatory variable, I show that the return to seniority is markedly reduced using GLS while it virtually disappears using IV-GLS, at both the one-digit and three-digit levels. Therefore, it seems that what matters most for the wage profile in terms of human capital is industry-specificity, not firm-specificity.
Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest in risky projects offering no risk premium. Consistently with empirical evidence, the model predicts that poorer entrepreneurs are more likely to undertake risky projects. It also finds that incentives for risk taking are stronger when agents are impatient. (JEL G31, G32, L25, L26).
This paper develops and estimates a search model in which career-specific and firm-specific matches determine job mobility and wage growth. Each worker-firm and worker-career relationship is characterized by a match that evolves stochastically over time. At each period, a worker has three options. He can: 1) stay at his current firm, 2) draw a new firm-specific match by changing employer or 3) change career by drawing a new career and firm-specific match. I calculate the likelihood function treating the model as a non-Gaussian state-space model where the unobserved state variables are the firm and career matches and the non-gaussianity is due to the selection process. I use the structural estimates to calculate ex-ante and ex-post returns to firm tenure or career experience. The implied estimates of the returns are different from the estimates that I would find using standard IV techniques. In order to understand the causes of these differences, I show that these IV techniques are not able to consistently estimate the parameters of a search model like the one presented in this paper.
Is the capitalist function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Frank H. Knight and Joseph A. Schumpeter held different views on the answer to this question. The authors' empirical findings side with Knight: liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: the data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal. Copyright 1989 by University of Chicago Press.
This paper presents a model of job matching the generalizes the existing literature by allowing for different jobs types, or occupations. Such differences affect the value of job-specific experience, inducing a career profile where certain types are sampled before others. More specifically, the analysis shows that it is optimal for the young and inexperienced to gravitate toward jobs exhibiting a certain kind of risk. Then, after deriving the equilibrium job turnover rate for an economy in which people do not switch occupations, panel data are used to estimate its underlying parameters. The hypothesis that people do not switch occupations is rejected against the alternative that they do, thus providing empirical support for the theoretical extension undertaken here.
This paper constructs and calibrates a parsimonious model of occupational choice that allows for entrepreneurial entry, exit, and investment decisions in the presence of borrowing constraints. The model fits very well a number of empirical observations, including the observed wealth distribution for entrepreneurs and workers. At the aggregate level, more restrictive borrowing constraints generate less wealth concentration and reduce average firm size, aggregate capital, and the fraction of entrepreneurs. Voluntary bequests allow some high-ability workers to establish or enlarge an entrepreneurial activity. With accidental bequests only, there would be fewer very large firms and less aggregate capital and wealth concentration.
This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Becau se of capital-market imperfections, poor agents choose working for a wa ge over self-employment and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will ther e be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, the authors demonstrate the robustness of this result b y extending the model dynamically and studying examples in which initi al wealth distributions have long-run effects. Copyright 1993 by University of Chicago Press.
Results from the Displaced Worker Surveys show that the wage cost of switching industries following displacement is strongly correlated with predisplacement measures of both work experience and tenure. Workers apparently receive compensation for some skills that are neither completely general nor firm-specific but rather specific to their industry or line of work. Further, among displaced workers who find new jobs in their predisplacement industry, postdisplacement returns to predisplacement job tenure resemble cross-section estimates of the returns to current seniority. This suggests that firm-specific factors may contribute little to the observed slope of wage-tenure profiles. Copyright 1995 by University of Chicago Press.
We present a qualitative and quantitative analysis of the standard growth model modified to include precautionary saving motives
and liquidity constraints. We address the impact on the aggregate saving rate, the importance of asset trading to individuals,
and the relative inequality of wealth and income distributions.
This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labor productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption. (Copyright: Elsevier)
We document and analyze the high level and the substantial increase in worker mobility in the United States over the 1968-97 period at various levels of occupational and industry aggregation. This is important in light of the recent findings that human capital of workers is largely occupation- or industry-specific. To control for measurement error in occupation and industry coding, we develop a method that utilizes the PSID Retrospective Occupation-Industry Supplemental Data Files. We emphasize the importance of our findings for understanding a number of issues such as the changes in wage inequality, aggregate productivity, job stability, and life-cycle earnings profiles. Copyright 2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
We explore to what extent differences in employment and unemployment across economies can be generated by differences in labor market policies. We use a version of the Lucas-Prescott equilibrium search model with undirected search and endogenous labor-force participation. Minimum wages, degree of unionization, firing taxes, and unemployment benefits are introduced and their effects analyzed. When the model is calibrated to US observations it reproduces several of the elasticities of employment and unemployment with respect to changes in policies reported in the empirical literature. We find that: i) minimum wages have small effects; ii) firing taxes have similar effects to those found in frictionless general equilibrium models; iii) unions have large and negative effects on employment, unemployment, and welfare; and iv) unemployment benefits substantially increase unemployment and reduce welfare.
Many previous studies have found a strong positive effect of job seniority (tenure) on wages. This paper re-examines the evidence
using a simple instrumental variables scheme to deal with the fact that tenure is likely to be related to unobserved individual
and job characteristics that affect the wage. We use the variation of tenure over a given job match as the principal instrumental
variable for tenure. The variation in tenure over the job is uncorrelated by construction with the fixed individual and job
match specific components of the error term of the wage equation. Our main finding is that the partial effect of tenure on
wages is small, and that general labour market experience and job shopping account for most wage growth over a career. The
strong cross section relationship between tenure and wages is due primarily to heterogeneity bias.
Thirty years after the Great Depression, economists have again worked up the nerve to ask an obvious question: Why is it that workers choose (under some conditions) to be unemployed rather than to take employ- ment at lower wage rates? Soon after serious attention began to be focused on this question, a variety of models were advanced to illustrate how workers might rationally prefer some other activity to work at wage rates they perceive to be temporarily below norma1.r A particularly interesting class of models arises when the alternate activity is taken to be job search: The worker is faced with a wage offer which he views as a drawing from a probability distribution; his choices are to accept the offer or to take another drawing.2 (To be of interest, obviously, these choices must be mutually exclusive: One must be unable to search and work at the same time.) Most contributors to this literature on search behavior subscribe to some form of the Friedman-Phelps notion that there exists a natural rate of unemployment which either cannot or should not (or perhaps both) be lowered (on average) by monetary and fiscal policies3 Yet while the language used in discussing this natural rate suggests that it may have the properties of a competitive equilibrium, there exist no theoretical models in which a nonzero equilibrium unemployment rate is determined IA number of these are collected in Phelps et al. (lo). The central ideas can be traced at least back to Hicks (S).
We study the impact of tax and transfer programs on steady-state allocations in a model with search frictions, an operative labor supply margin, and incomplete markets. In a benchmark model that has indivisible labor and incomplete markets but no trading frictions we show that the aggregate effects of taxes are identical to those in the economy with employment lotteries, though individual employment and asset dynamics can be different. The effect of frictions on the response of aggregate hours to a permanent tax change is highly nonlinear. There is considerable scope for substitution between "voluntary" and "frictional" nonemployment in some situations.
The authors use household survey data from the Demographic and Health Surveys (DHS) from 44 surveys (in 35 countries) to document different patterns in the enrollment and attainment of children from rich and poor households. They overcome the lack of income or expenditure data in the DHS by constructing a proxy for long-run wealth of the household from the asset information in the surveys, using the statistical technique of principal components. There are three major findings. First, the enrollment profiles of the poor differ across countries but fall into distinctive regional patterns: in some regions the poor reach nearly universal enrollment in first grade, but then drop out in large numbers leading to low attainment (typical of South America), while in other regions the poor never enroll in school (typical of South Asia and Western/Central Africa). Second, there are enormous differences across countries in the "wealth gap," the difference in enrollment and educational attainment of the rich and poor. While in some countries the difference in the median years of school completed of the rich and poor is only a year or two, in other countries the wealth gap in attainment is 9 or 10 years. Third, the attainment profiles can be used as diagnostic tools to suggest issues in the educational system, such as the extent to which low attainment is attributable to physical unavailability of schools. Copyright 1999 by The Population Council, Inc..
The modern economic role of women emerged in four phases. The first three were evolutionary; the last was revolutionary. Phase I occurred from the late nineteenth century to the 1920s; Phase II was from 1930 to 1950; Phase III extended from 1950 to the late 1970s; and Phase IV, the "quiet revolution," began in the late 1970s and is still ongoing. Three aspects of women's choices distinguish the evolutionary from the revolutionary phases: horizon, identity, and decision-making. The evolutionary phases are apparent in time-series data on labor force participation. The revolutionary phase is discernible using time-series evidence on women's more predictable attachment to the workplace, greater identity with career, and better ability to make joint decisions with their spouses. Each of these series has a sharp break or inflection point signifying social and economic change. These changes, moreover, coincide by birth cohort or period. The relationship between the development of modern labor economics and the reality of women's changing economic role is explored. The paper concludes by assessing whether the revolution has stalled or is being reversed. Women who graduated college in the early 1980s did not "opt-out,"but recent cohorts are too young to evaluate.
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Measuring Mismatch in the U.S. Labor Market
- Ayşegül Şahin
- Joseph Song
- Giorgio Topa
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