Essays on the Macroeconomics of Frictional Labor Markets

Abstract

This dissertation comprises three chapters that investigate distinct aspects of how labor market frictions shape the aggregate economy. The first chapter discusses the implications of the rise in spatial inequality observed across developed economies. It develops a model of two-sided spatial sorting with mobility frictions. This model can be quantified using a novel bi-clustering algorithm that classifies workers and firms into types while allowing for arbitrary worker-firm complementarities and sorting. The model is then applied to study an episode of rising spatial inequality in West Germany: Using the model and its quantification, I (i) identify a cause for rising spatial inequality, distinguishing changes in sorting from changes in technology; (ii) discuss the implications of rising spatial inequality for workers and investigate the role of spatial inequality in shaping forward-looking worker utility; (iii) derive implications for spatial policy when workers and firms sort across space. The second chapter develops a theory of slow labor market recoveries under selection. I show that selection of workers by firms can propagate composition effects that depress job creation effects until far into the recovery. To this end, I modify the standard matching technology to allow for two-sided multiplicity of encounters, which allows for selection. The selection mechanism implies that, under slack markets, the economy’s most unproductive workers frequently get outranked by theirmore productive peers. This leads to persistent compositional changes in the pool of job searchers that reduce the vacancy posting incentive and thus keep market slack. A powerful feedback loop emerges and selection serves as an amplifying force which keeps unemployment elevated for years in the aftermath of recessions. The third chapter, co-authored with Jake Bradley, investigates the role of informational frictions in shaping labor market dynamics. We show that informational frictions provide a solution to several micro- and macro-economic puzzles found in the literature. We study a general equilibrium model in which workers use the frequency of job offers to learn about the market demand for their labor and calibrate the model closely to match the relationship between beliefs and labor market outcomes observed in SCE data. We find that the model simultaneously rationalizes a number of important data features: Wages decline in the duration of unemployment, there is a large amount of cross-sectional wage dispersion, worker’s beliefs are distorted relative to their true expected outcomes and responses to aggregate shocks are amplified through wage rigidity.