Essays in Macro-Labor Economics

This dissertation contains three essays on the macroeconomic effects of labor market policies. Chapter one focuses on the effect of the minimum wage on overqualification, the situation where workers are employed in jobs that do not require their skill levels. This chapter introduces match-specific productivity and a minimum wage to a labor search model with both heterogeneous workers (low- and high-skilled) and vacancies (simple and complex). Although higher minimum wages make simple vacancies more attractive to high-skilled workers, which may result in aggregate misallocation, they also create conditions that either promote or discourage vacancy creation, the net effect of which determines whether firms open more or reduce the amount of vacancies of a given type that they open. I find that there is an inverted U-shaped relationship between the overqualification rate (the ratio of overqualified workers to all employed high-skilled workers) and the minimum wage. The higher overqualification rate is driven by both an increase in the amount of overqualified workers and a decrease in the amount of appropriately matched high-skilled workers, which implies that the minimum wage has a misallocation effect by moving high-skilled workers out of complex jobs and into simple jobs. The overqualification rate peaks at 41.6 percent when the minimum wage reaches $9.05. I also show that there is an inverted U-shaped relationship between the amount of simple vacancies and the minimum wage and explain theoretically how that could give rise to lower unemployment in the economy upon a minimum wage increase.

Chapter two studies the spillover effects of the minimum wage on wages higher up in the wage distribution. I introduce a minimum wage into a Mortensen and Pissarides (1994) search and matching model to analyze the direction of these spillovers. I show that a model with a binding minimum wage delivers lower Nash-bargained wages than one without that feature, and higher minimum wages negatively affect wages of those for whom the minimum wage is not binding. This finding helps explain why inequality falls as the minimum wage increases: wages are less dispersed because higher wage floors compress the wage distribution both from the bottom and from the top, i.e. they raise the wages of those at the bottom of the wage distribution and lower the wages of workers who earn the most in the economy.

In chapter three, joint with Jan Gottschalk and Ruifeng Zhang of the International Monetary Fund, we analyze the macroeconomic effects of a public employment reduction in Bosnia and Herzegovina (BiH) whose labor market is characterized by a high level of public sector employment along with many structural problems such as a high labor income tax and rigid wages. We inspect the effect of a reduction in public sector employment on the economy under two scenarios, one of which assumes that the labor market environment remains the same where laid-off public employees cannot find work in the private sector, and another that assumes a reformed labor market where there is perfect labor mobility across the public and private sectors. Our analysis finds that under the current rigid labor market, there is a modest increase in total output, while the increase in production under the reformed labor market is much larger. We attribute this latter result to the investment boom that accompanies the increase in the supply of labor to the private sector, which results from the reduction in public sector employment.