Referral Networks and Inequality*

This is the first paper to study the interaction between labour markets and endogenous referral networks in the context of worker heterogeneity. In equilibrium the structure of the referral network is hierarchical, which is different from the usual assumption of homophily but is consistent with the evidence. Hierarchy exacerbates inequality. The welfare effects of the use of referrals are subtle and depend on the nature of heterogeneity. If heterogeneity is due to productivity differences, referrals improve welfare. If workers face different probability of forming a match despite having the same productivity, as in the case of discrimination, referrals reduce welfare.

Revisiting Union Wage and Job Loss Effects Using the Displaced Worker Surveys

Estimates of union wage effects have been challenged by concerns regarding unobserved worker heterogeneity and endogenous job changes. Many economists believe that union wage premiums lead to business failures and other forms of worker displacement. In this article, the authors examine displacement rates and union wage gaps using the 1994–2018 biennial Displaced Worker Survey (DWS) supplements to the monthly Current Population Surveys. For more than two decades, displacement rates among union and non-union workers have been remarkably similar. The authors observe changes in earnings resulting from transitions between union and non-union jobs following exogenous job changes. Consistent with prior evidence from the 1994 and 1996 DWS, findings show longitudinal estimates of average union wage effects close to 15%, which are similar to standard cross-section estimates and suggestive of minimal ability bias. Wage losses moving from union to non-union jobs exceed gains from non-union to union transitions.

The wage curve and local monopsony power

Using longitudinal micro-data from Finland, a country with a geographically dispersed population and relatively long distances between local labor markets, this paper examines the responsiveness of the pay level to local unemployment conditions. In particular, this study tests the hypothesis that the pay level is more responsive to the unemployment level in less agglomerated and more remote regions as might be expected if employers have a higher degree of monopsony power in such regions. The results consistently suggest that the pay level is lower in localities with a higher unemployment level and, hence, provide strong support for the so-called wage curve hypothesis, which predicts that a negative relationship exists between local unemployment and the pay level. Although the results provide some evidence that the magnitude of the regional pay–unemployment relationship varies across different regions of the country, the findings do not provide consistent support for the monopsony power hypothesis. In particular, after controlling for unobserved worker heterogeneity, the responsiveness of the pay level to the local unemployment conditions is similar across regions with different degrees of economic agglomeration.

Worker Heterogeneity and the Popularity of the Minimum Wage Institution

This paper analyzes long run outcomes resulting from adopting a binding minimum wage. The model distinguishes between workers of heterogeneous ability, and capitalists who do all the saving, and it entails – relative to the perfectly competitive benchmark - large output and employment losses (among the lowest-ability workers) from the imposition of moderately binding minimum wages. These effects arise not only because firms respond to the wage increase – relative to the static perfectly competitive benchmark – by moving upwards along a given labour demand curve, but also due to inward shifts of the labour demand curve as savers respond to decreases in the (net of taxes) rate of return on their savings by saving less, thus reducing the economy’s steady-state capital stock. Nevertheless, and despite the large, long-run, declines in aggregate output, consumption, and the capital stock implied by this model, MW legislation can be beneficial for large segments of employed workers, as long as they do not have to provide generous welfare support to the low-ability workers that the MW prevents them from finding employment.