Macroeconomics of Labor Markets

This dissertation examines various aspects of the macroeconomics of labor markets. Chapter 1 develops a frictional labor market model that incorporates worker vacating, i.e., workers exiting the labor market hence vacating their positions. It provides novel insights into the business cycle theory of unemployment: Procyclical employment-to-nonparticipation quits contribute to vacancy fluctuations, accounting for about one-third of unemployment fluctuations. It also sheds new light on the possibility of a "soft landing" during the "Great Resignation": While creating a new job as investment activity is responsive to the interest rate, reposting a vacated position is not. Chapter 2, joint with Moritz Kuhn and Iourii Manovskii, studies the spatial differences across local labor markets. Guided by the novel facts on the geography of vacancies and job filling, we develop a spatial version of a Diamond-Mortensen-Pissarides model with endogenous separations and on-the-job search that quantitatively accounts for all the documented empirical regularities. The model also quantitatively rationalizes why the job-separation rate is more important in accounting for spatial differences in unemployment while the job-finding rate is more important in accounting for business cycle fluctuations in unemployment. Chapter 3, joint with Jincheng (Eric) Huang, investigates how wealth affects the allocation of workers and jobs. Using NLSY79 and O*NET, we document that wealth-poor workers are more mismatched with their jobs. We develop a model featuring worker and firm heterogeneity, search frictions, and incomplete markets, where a lack of wealth induces workers to trade off wages for finding a job faster due to precautionary motives. This phenomenon, referred to as "precautionary mismatch," leads to substantial within-type earnings and productivity gaps between the wealth-rich and the wealth-poor, especially among high-skilled workers. Chapter 4, joint with Hanming Fang, proposes and empirically implements a framework to infer from the repeated cross-sectional earnings data the experience effect, the cohort effect, and the time effect, under an identifying assumption that the growth of the experience effect stops at the end of one's working career. Applying this framework to data from China and the United States, we find that China has experienced a much larger inter-cohort productivity growth and higher increase in the rental price to human capital but lower returns to experience, compared to the U.S. We use the inferred components to revisit several applications in macroeconomics and labor economics.