Working Papers

Specific Capital and the Business Cycle Effects on the Postgraduate Wage Premium

Over the business cycle, postgraduate degree holders experience lower wage variation than those with undergraduate degrees. Moreover, postgraduates have more specific human capital. Using an equilibrium search model with long-term contracts and imperfect monitoring of workers’ effort, this paper attributes the cyclicality of the postgraduate-undergraduate wage gap to the differences in match-specific capital. Imperfect monitoring creates a moral hazard problem that requires firms to pay efficiency wages. On the other hand, more specific capital lower mobility thereby alleviating moral hazard and improving risk-sharing. Estimates reveal that specific capital explains the differences both in labour turnover and in wage cyclicality across education groups.

Durables, Lemons, and Shocks

joint with Richard Blundell, Hamish Low, Soren Leth-Petersen, and Costas Meghir

The second-hand car market is subject to asymmetric information about the quality, which generates an endogenous transaction cost — lemons penalty. In this paper, we model sales and purchases of new and second-hand cars and quantify the lemons penalty. We do this by formulating a stochastic life-cycle general equilibrium model of car ownership in which dealers buy old cars from consumers without knowing their exact quality, fix them and sell them back to consumers. Car dealers are offered cars that on average are of lower quality than similar cars in the population. Dealers, therefore, will not pay the expected value of cars being owned to an offered car. They will ask for a price discount, which is the lemons penalty. We structurally estimate the model using a population-wide Danish administrative data set with complete information about car ownership for the period 1992-2009. The data is linked to longitudinal income-tax records of the owners with information about income and wealth. Our results show that 1-year-old car has the largest lemons penalty, which declines over time. Asymmetric information about the quality delays car replacement and substantially lowers transaction volumes. Then we use the estimated model to study the impact of lemons penalty for cars to act as a self-insurance device in the event of unemployment.

The Impact of Unemployment Insurance on the Cyclicality of Labour Force Participation

This paper studies how unemployment insurance benefit (UI) changes labour force participation over the business cycle. Standard theory predicts that labour force participation should fall in recessions, as the returns of job search decline. In fact, it is acyclical (moves independently of the business cycle). I argue that UI, being negatively correlated with the business cycle, is the reason. I document a new fact that the Maximum UI Weekly Benefit Amount is relatively higher in recessions than in booms. My theory is that as UI is more generous in recessions, unemployment becomes more attractive than out-of-labour-force (OLF). While some workers drop out of the labour force due to no job opportunities, others participate to enjoy the higher UI. I embed the counter-cyclical UI into a search model with aggregate productivity shocks and endogenous labour force participation. I show that although the cyclical variation in the level of UI is small, it plays a vital role in shaping fluctuations in the participation rate. The model is also able to capture other cyclical movements in labour market stocks and gross worker flows. The model also shows that counter-cyclical UI can stabilise the economy by reducing the variation in employment and GDP.