Essays on the macroeconomics of labor markets

Fatih Karahan, University of Pennsylvania


This dissertation consists of three chapters each of which study a different aspect of the labor market. ^ In the first chapter, we focus on the statistical modeling of labor income risk. In particular, we ask if workers at different points in their life face the same variance of earnings risk and if the persistence of earnings changes over the life cycle. We propose a novel specification for residual earnings that allows for life-cycle profiles in the persistence and variance of labor income shocks. We estimate this process using data from the Panel Study of Income Dynamics (PSID). We find that shocks to earnings are only moderately persistent for young workers (around 0.75) and the variance of persistence shocks exhibits a U-shaped profile over the life cycle. We also propose a theory to explain the life-cycle profiles and study the implications of life-cycle heterogeneity on consumption-savings decisions. ^ Second chapter studies the evolution of the college premium in the U.S. labor market over the last 40 years. There are at least three different sources of variation: (1) Shifts in the relative supply of and demand for college versus high school labor; (2) Shifts in the relative supply of and demand for skills in the college versus high school sector; and (3) composition effects. We investigate how each of these components contributes to the dynamics of the college premium and find that all three play a role, but the increase in the college premium is primarily driven by the first component. ^ Third chapter studies the role of the housing bust in 2007 on the U.S. labor market during and after the 2007-2009 recession, also known as "The Great Recession". In particular, we evaluate the hypothesis that the decline in house prices decreased the geographical mobility of households from low to high productivity regions and exacerbated unemployment. To do so, we construct and calibrate a two-region search model of housing and labor markets. A housing bust decreases the home equity of homeowners and makes it harder to afford a new house after moving due to a down payment requirement. The model can account for a number of facts regarding the labor market and migration rates both before and during the recession. We find that 0.5 percentage points of the rise in unemployment during the recession is due to the fall in house prices.^

Subject Area

Economics, General|Economics, Labor

Recommended Citation

Fatih Karahan, "Essays on the macroeconomics of labor markets" (January 1, 2012). Dissertations available from ProQuest. Paper AAI3509141.