Essays in Macroeconomics and Heterogeneity
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Graduate group
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Consumption and savings
High-cost credit
Household heterogeneity
Labor search
Mismatch
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Abstract
This thesis centers around two closely related themes: the macroeconomic consequences of inequality, and the consumption-savings behavior of households at the lower end of the wealth distribution. The first chapter studies how wealth affects the extent to which the "right" workers are matched with the "right" jobs in the labor market. Empirical analyses based on NLSY79 and O*NET shows that wealth-poor workers are more mismatched with their jobs. A model featuring worker and firm heterogeneity, search frictions, and incomplete markets is then developed to study the macroeconomic implications of this phenomenon. Workers and firms jointly face a trade-off between the speed and payoff of forming a match. A lack of wealth induces workers to trade off wages for faster job-finding due to precautionary motives, which in turn offers a wider range of firms the incentive to match. This phenomenon is referred to as "precautionary mismatch". The calibrated model shows three main results. First, there are substantial earnings and productivity disparities between wealth-rich and wealth-poor workers of the same productivity type, especially for high-skilled workers. Second, total output would be 3% higher in the US if all employed workers were allocated to the right jobs. Finally, a counterfactual experiment through the lens of the model suggests that wealth transfers from incumbent workers to young labor market entrants reduce earnings and productivity dispersion within worker productivity types, improve sorting, and enhance labor productivity. Overall, most of the productivity increase can be attributed to reduced under-matches of high productivity type workers. The second chapter highlights the link between the utilization of high-cost consumer credits by wealth-poor households and the risks associated with household expenditures. Using the PSID and the SCF, I document that households with very limited liquid wealth and available credit while facing unexpected expenses are more likely to resort to high-cost credit options, such as payday loans. Furthermore, these unexpected expenses probably stem from specific spending categories, such as medical costs as well as vehicle and home repairs. For households at their borrowing constraints, occurrence of expenditure shocks tends to reduce consumption growth and savings rate, which impedes wealth accumulation. I discuss the role of expenditure shocks in models of consumption-savings and why they are crucial for understanding the demand for high-cost credits.