How Much Should we Trust Estimates of Firm Effects and Worker Sorting? (with Stéphane Bonhomme, Thibaut Lamadon, Elena Manresa, Magne Mogstad and Bradley Setzler) (JOLE)
Many studies use matched employer-employee data to estimate a statistical model of earnings determination where log-earnings are expressed as the sum of worker effects, firm effects, covariates, and idiosyncratic error terms. Estimates based on this model have produced two influential yet controversial conclusions. First, firm effects typically explain around 20% of the variance of log-earnings, pointing to the importance of firm-specific wage-setting for earnings inequality. Second, the correlation between firm and worker effects is often small and sometimes negative, indicating little if any sorting of high-wage workers to high-paying firms. The objective of this paper is to assess the sensitivity of these conclusions to the biases that arise because of limited mobility of workers across firms. We use employer-employee data from the US and several European countries while taking advantage of both fixed-effects and random-effects methods for bias-correction. We find that limited mobility bias is severe and that bias-correction is important. Once one corrects for limited mobility bias, firm effects matter less for earnings inequality and worker sorting becomes always positive and typically strong.
Note: For code cf. here.
The Role of Workers in Knowledge Diffusion Across Firms (with Anders Akerman)
We analyze the effect of labor mobility and innovation on productivity growth. With event-study analysis based on exogenous worker deaths and shift-share international trade shocks, we show that both the extent and direction of worker mobility affect firm productivity. We develop a multi-worker-firm framework with random search and on-the-job mobility to estimate the relative contribution of mobility and R&D to growth. Estimated on a balanced growth path using Swedish microeconomic data, we find that over 60% of output growth can be attributed to worker mobility. Our results suggest that a slowdown of worker mobility can depress aggregate economic growth.
The Two Faces of Worker Specialization (with Zsófia Barany)
Can specialization – the average distance of the worker’s skill set from skill profiles prevalent in the economy – confer both positive and negative returns? We quantitatively show in a random search framework that more specialized workers i) suffer larger mismatch penalties on average, leading to lower job finding rates, but ii) enjoy higher gains from worker-firm complementarity in well-fitted jobs, reflected in higher starting wages and lower separation rates. The theoretical model indicates that the acquisition of more specialized skills may or may not yield an augmented lifetime income for workers. Hence, the acquisition of more specialized skills can come at a loss of lifetime income for some workers. Informed by the model, we analyze the labor market outcomes of exogenously displaced workers in the US and in France and provide empirical evidence for the two faces of worker specialization.
Life-Cycle Wage Growth and Firm Productivity in Developed and Developing Economies (with Juan Munoz)
Life-cycle wage growth rates vary significantly across countries. In this paper, we examine the role of the local distribution of firm productivity in shaping life-cycle wage profiles by introducing a random search model that disentangles the effects of firm productivity distribution, on-the-job learning, and labor market frictions on life-cycle wage growth. Using data from Brazil, Colombia, and the United States, we document strong correlations between the firm productivity distribution—proxied by the share of large firms in the economy—and the steepness of life-cycle wage trajectories. Estimates of the model for the three countries suggest that the shape and scale of the firm-type distribution are key factors in explaining the steepness of life-cycle wage growth. Additionally, counterfactual simulations suggest that equating the firm-type distribution in Brazil and Colombia to that of the United States would fully close the cross-country gap in the steepness of workers’ life-cycle wage trajectories.
Gender Differences in Amenities, Wages, and Firms (with Yana Gallen, Nabanita Datta Gupta and Kristian Stamp Hedeager)
This paper links rich survey data on temporal and spatial job flexibility measures with matched employer-employee administrative data to understand the relationship between job characteristics and gender pay gaps. Motherhood is associated with a move to set schedules, shorter hours and moves away from jobs requiring a worker to be on-call and jobs entailing evening work. We find that controlling for these amenities at the firm level explains a substantial portion of the overall movement of women to different types of firms around motherhood both in terms of pay-premiums and in terms of revealed-preference measures of firm quality such as pagerank or the poaching rate. To directly estimate the value of these amenities to workers, we conduct an incentivized hypothetical choice preference elicitation exercise in which workers make choices between jobs with different amenities and wages. This exercise suggests that compared to men, women have a strong aversion to jobs requiring oncall work, jobs with evening work, and jobs which do not allow flexibility in dealing with family concerns. Accounting for the value of these amenities gives a gender gap in compensation which is 20% smaller than the gender gap in pay.
Wage Bargaining and Wage Posting Firms (with Jean-Marc Robin)
This paper characterizes wage bargaining and wage posting firms. Using a theoretically derived likelihood-based estimation and clustering algorithm, we classify firms into either wage-bargaining or wage-posting types. Empirically, we leverage survey data from Germany and administrative data from Austria and find strikingly similar characterizations of both firm types. We find that wage-bargaining firms, which account for about 43% of Austrian firms and 43% of German firms, exhibit higher productivity and within-firm wage variation. Our model explains job-to-job mobility with wage decreases as workers trade current wages at posting firms for potential future gains at bargaining firms. Ensuing inefficient mobility accounts for 11–17% of worker transitions and about 1-2% of output losses.
Using three European matched employer-employee data sets, I show that workers experiencing high positive or negative changes in wages subsequently have a high propensity of job separation. In all three data sets, a change in wages of 10 percentage points above or below the median coincides with roughly 30% higher odds of job separation. The pattern is more pronounced among low experience workers. Theoretically, I rationalize the empirical finding as a result of information and labor market frictions in a random search model with two-sided heterogeneity and symmetric learning about worker ability. In the framework, workers with low experience have a high initial volatility of wage changes and move between firms to enjoy productivity benefits. I allow for additional channels of wage growth through contract renegotiation and dynamic match productivity and let firms differ in the volatility of production shocks. In the model, workers can partially reduce their wage exposure to productivity shocks by accumulating wage negotiation capital such that the volatility of wage changes falls endogenously on the job ladder. An uneven distribution of volatile firms along the job ladder further increases wage stability with experience. I thereby show that the job ladder does not only determine worker's level of wages but can also account for part of its variability.
New version joined with Lewin Nolden coming soon!
Worker Specialization and the Aggregate Economy (with Zsófia Barany)
How does the quality of job matches affect the aggregate economy? In this paper, we study how specialization, i.e. the growing adaptation of workers to their job, can amplify business cycles. On the one hand, specialization can increase output and job stability when aggregate productivity is high. On the other hand, worker specialization can decrease the odds of job finding after displacement when aggregate productivity is low. To quantify their impact, we solve and estimate a random search model with multidimensional skills and aggregate shocks using neural networks. We estimate the model on French and US data. Differently from the literature, our estimation procedure with neural networks allows fitting of any empirical moment vector as a plug-in, facilitating cross-country comparisons about the importance of specialization.
Inheritance taxes and family firms in Germany (with Charlotte Bartels, Theresa Buehrle, Gedeão Locks and Duncan Roth)
While tax avoidance has been identified as the primary behavioral response to inheritance and gift taxation, relatively few is known about the potentially negative externalities of inheritance and gift tax avoidance on production, employment and output of firms being transferred from one generation to the next. In this paper, we study the effect of business gift tax avoidance on firm growth and employment in Germany. Since 2009, the German inheritance and gift tax law creates an incentive to downsize before a firm transfer. We estimate excess separations before ownership transfer of family firms to quantify the efficiency cost of inheritance and gift tax avoidance in Germany, where family firms represent the backbone of the economy. We find that affected firms cut a small but significant amount of employment before transfer.
Ongoing Projects:
Bicycle Paths and Wages (with Elena Mattana). Recipient of AUFF NOVA grant.
Acqui-Hires (with Jingnan Liu)
ANR (2024) grant Project FIRMSIZE (with Clara Santamaria)