Residual Wage Research Articles

The pro-competitive consequences of trade in frictional labor markets

What are the pro-competitive consequences of trade in frictional labor markets? This paper develops and estimates a dynamic general equilibrium trade model to show that the interplay between endogenously variable markups in product markets and frictions in labor markets has important implications for aggregate as well as distributional consequences of trade. In particular, I show that once markups are allowed to respond to trade liberalization, unemployment and residual wage inequality rise almost three times more than in a model with constant markups (in the steady state). The presence of labor market frictions makes the pro-competitive gains from trade liberalization negative.

WAGE RISK, EMPLOYMENT RISK, AND THE RISE IN WAGE INEQUALITY

AbstractU.S. male residual wage inequality rose, and the employment rate fell between 1983 and 2013. Using a structural labor market model, we show that rising idiosyncratic wage risk and lower taxes at the bottom of the earnings distribution are the main forces behind rising wage inequality. The former contributes to the falling employment rate. Falling real wages and rising disability risk further depressed employment of workers without a college degree and rising exogenous job destruction depressed employment of workers with a college degree. Higher idiosyncratic risk entails large welfare losses with the largest losses among workers without a college degree.

Gender segregation: analysis across sectoral dominance in the UK labour market

This paper aims to evaluate how changing patterns of sectoral gender segregation play a role in accounting for women’s employment contracts and wages in the UK between 2005 and 2020. We then study wage differentials in gender-specific dominated sectors. We found that the propensity of women to be distributed differently across sectors is a major factor contributing to explaining the differences in wages and contract opportunities. Hence, the disproportion of women in female-dominated sectors implies contractual features and lower wages typical of that sector, on average, for all workers. This difference is primarily explained by “persistent discriminatory constraints”, while human capital-related characteristics play a minor role. However, wage differentials would shrink if workers had the same potential and residual wages as men in male-dominated sectors. Moreover, this does not happen at the top of the wage distribution, where wage differentials among women working in female-dominated sectors are always more pronounced than those among men.

Sectoral and regional impacts of trade liberalization on the skilled-unskilled wage-gap in Pakistan

This study explores the impacts of trade liberalization on the skilled-unskilled wage gap (henceforth SUSWG) by using the micro-level data of Pakistan. It is generally believed that when economies are liberalized, the SUSWG increases, especially in poor economies. Our study uses a two-step estimation methodology. We used two measures for SUSWG at sectoral and regional levels. We employed Oaxaca-Blinder decomposition for residual wage-gap, and log-wage-gap. For empirical (i.e., sectoral and regional) analysis, we employed Fixed effects (FE), Random effects (RE) and FE with Driscoll-Kraay Standard Errors (DKSEs), feasible generalized-least-squares (FGLS), and Panel-corrected Standard Errors (PCSE). We used sectoral panel data for sectoral analysis and provincial panel data for regional analysis, using the data from 1990 to 2005. Our study finds that protection rates and SUSWG are associated in Pakistan. Trade liberalization increases the SUSWG. The sectoral and regional analysis reveal similar findings on the impact of liberalization on SUSWG. Moreover, our results are robust and insensitive to various controls, measurement approaches (i.e., the log wage gap and the residual wage gap), and econometric techniques. We also find that lagged tariffs increase the SUSWG. Our findings will provide guidelines for policymakers to make future policies regarding trade liberalization and SUSWG in Pakistan.

Uncovering the roots of obesity-based wage discrimination: The role of job characteristics

This paper investigates the roots of potential labor-market discrimination underlying the negative correlation between obesity and hourly wages. Using a panel dataset of white individuals drawn from the U.S. 1997 National Longitudinal Survey of Youth (NLSY97), we test whether residual wage gaps could be attributed to prejudice (taste-based discrimination) and/or statistical discrimination. To this end, we examine how these two types of discrimination hinge on a wide range of obese individuals’ specific job and occupational characteristics (drawn from the O*Net Online database). In particular, our analysis sheds light on whether discrimination originates from clients’ attitudes, fellow workers or employers. Our findings are consistent with taste-based discrimination against obese females, especially as they become older, in jobs requiring frequent communication with either clients or employers. However, the evidence on this issue is weaker for males. We conjecture that these differences may originate from both an over-representation of males among employers and different image concerns against people of the same gender.

Is the disability wage gap a gendered inequality? Evidence from a 13-year full population study from Norway

Recent research has confirmed the employment disadvantages of disabled people, but disability wage gaps in interaction with gender have not been sufficiently explored. This article asks how the disability wage gap can be accounted for, how the unexplained disability wage gap has evolved over time and how the intersections of disability and gender relate to wage penalties. Norwegian nation-wide annual registry data from the period 2005–2017 (N = 8.5 million) are used to estimate longitudinal pay gaps of disabled men and women in relation to nondisabled workers. The analyses arrive at a persistent residual wage gap for disabled employees. Results confirm that gender is a defining predictor for income, and that disabled women are especially disadvantaged. Implications for intersectional theory are discussed. The current study is a reminder that antidiscrimination legislation and implementation of regulations has not been successful in levelling out injustices experienced by disabled people in the labour market.

Does trade liberalization increase the formal-informal wage-gap in Pakistan?

This study assesses the influence of the 1988 trade liberalization on the formal-informal wage gap (FIFWG) using micro-level manufacturing sector data from 1990 to 2005 in Pakistan. As trade liberalization affects both the formal and informal sectors' production capabilities, wage differentials between the two sectors' workers are expected. We employed Wage Premium Methodology (WPM), Oaxaca-Blinder decomposition, restricted least squares, and weighted least squares (WLS) regression models for empirical analysis. Our study finds that trade liberalization has an impact on the formal-informal wage gap on the observable characteristics as well as on the unobservable characteristics. This formal-informal wage gap in Pakistan has widened as a result of trade liberalization. After controlling for many sector-related variables, our findings are robust. Lagged-trade policy and the formal-informal wage gap are also strongly associated. Our results remain insensitive when using the three different approaches (i.e., the wage premium methodology, the wage gap methodology, and the residual wage gap). To benefit from trade liberalization, sensible labor market flexibility is a prerequisite. This study contributes to existing literature in the case of Pakistan in the following ways: firstly, the reduction in protection rates as a proxy for trade liberalization is used. This proxy is a policy-based proxy that captures the pure effects of trade policy as compared to outcome-based proxies (i.e., trade ratios). Secondly, this investigation considers the whole trade-regime as a study period to inspect the core impacts of the trade regime, as import tariffs radically decreased during this regime. Thirdly, we calculate two variables of FIFWG (i.e., wage premiums, and residual wage gap) for analysis. Fourthly, we employ manufacturing industry panel data for empirical analysis.

Exporters, Multinationals and Residual Wage Inequality: Evidence And Theory

This paper studies the implications for wage inequality of two distinct forms of globalisation, namely trade and foreign direct investment. I use German linked employer-employee data to (1) jointly estimate the exporter and the multinational wage premium and (2) to further distinguish between wage premia of multinational firms that are foreign owned (inward FDI) and domestically owned (outward FDI). My findings exhibit a clear hierarchy of firms’ international activities with regard to wage premia and workforce ability. I interpret these patterns using a theoretical framework, which incorporates ex-ante homogeneous workers, heterogeneous firms and search and matching frictions into a multi-region model of trade and FDI with monopolistic competition. The model allows me to account for the observed empirical patterns, and delivers novel insights about the interplay between trade, FDI and labour market institutions.

Trade liberalization and gender gaps in local labor market outcomes: Dimensions of adjustment in the United States

We provide empirical results that trade liberalization with China reduced gender gaps in local U.S. labor markets. In MSAs with higher exposure to trade liberalization, the simple wage gender gap decreased, while the residual wage gap increased, indicating important selection effects in labor force participation decisions. The reduction in the gender labor force participation gap was driven by higher entry of women, in particular more educated women, and exit of the less educated men. This results in intrahousehold adjustments in work dynamics, with women entering the labor force to offset the lost income of male partners who left the labor force. We show that trade liberalization increased female workers’ unemployment rate and reliance on part-time jobs.

Presidential Address 2019: How Should Tax Progressivity Respond to Rising Income Inequality?

AbstractWe address the question in the title in a heterogeneous-agent incomplete-market model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to being log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the United States, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription.

Perpetuating Inequality: What Salary History Bans Reveal About Wages

Pay gaps for women and minorities have persisted after accounting for observable differences. Why? If employers can access applicants’ salary histories while bargaining over wages, they can take advantage of past inequities, perpetuating inequality. Recently, a dozen US states have banned employer access to salary histories. We analyze the effects of these salary history bans (SHBs) on employer wage posting and pay in a difference-in-differences design. Following SHBs, employers posted wages more often and increased pay for job changers, particularly for women (6.2%) and non-whites (5.9%). Bargaining behavior appears to account for much of the persistence of residual wage gaps.

Cross-Sectional Facts for Macroeconomists: Wage, Income and Consumption Inequality in Turkey

We investigate the evolution of Turkey’s wage, income and consumption inequalities using a cross-country comparable methodology and the Turkish Statistical Institute’s Household Budget Survey and the Survey of Income and Living Conditions micro data sets. Turkey’s wage, income and consumption inequalities all exhibit downward time trends over the 2002-2016 period. This observation aligns well with the rapid minimum wage growth over the period. While wage inequality estimates display strong countercyclicality, income and consumption inequalities exhibit rather acyclical time-series movements. While recent education premium estimates of Turkey are similar to those in the early 2000s, estimates of recent gender and experience premiums, as well as residual wage inequality are lower. Income and consumption inequality estimates exhibit similar time trends with moderate level differences, and these trends are robust to the choice of inequality metrics.

Exporters, Multinationals and Residual Wage Inequality: Evidence and Theory

This paper studies the implications for wage inequality of two distinct forms of globalisation, namely trade and foreign direct investment. I use German linked employer-employee data to (1) jointly estimate the exporter and the multinational wage premium and (2) to further distinguish between wage premia of multinational firms that are foreign owned (inward FDI) and domestically owned (outward FDI). My findings exhibit a clear hierarchy of firms’ international activities with regard to wage premia and workforce ability. I interpret these patterns using a theoretical framework, which incorporates ex-ante homogeneous workers, heterogeneous firms and search and matching frictions into a multi-region model of trade and FDI with monopolistic competition. The model allows me to account for the observed empirical patterns, and delivers novel insights about the interplay between trade, FDI and labour market institutions.

Within-Job Wage Inequality: Performance Pay and Job Relatedness

Over the past few decades, we find that about 80% of the widening residual wage inequality to be within jobs. We propose performance-pay incidence and job relatedness as two primary factors driving within-job inequality and embed them into a sorting equilibrium framework. We show that equilibrium sorting is positive assortative both within-job and across jobs. While performance-pay position amplifies within-job wage inequality through self-selection, the overall relationship between job relatedness and within-job wage inequality is found generally ambiguous. To quantify the role played by these factors, we calibrate the model to the US economy in 2000, where the model can account around 92% of the changes in within-job inequality among the highly educated from 1990 to 2000. Counterfactual analysis shows the contributions of performance-pay incidence and job relatedness are about 42% and 26%, respectively, both higher than that of job-specific productivity. While performance-pay incidence is particularly crucial for within-job wage dispersion in business/professional industry and professional occupation, job relatedness is the most important for mining/goods/construction industry and sales occupation.

Emigrant selection and wages: The case of Poland

In this paper, I use a unique individual-level pre-migration labour market dataset for Poland to examine emigrant selection in two major destination countries, the United Kingdom and Germany. I compare the pre-migration observable and unobservable characteristics of emigrants with those of non-emigrants in Poland. First, I find that Polish emigrants to the UK are more similarly educated to non-emigrants while being more negatively selected on residual wages. Second, emigrants to Germany are disproportionately more likely to fall in the middle of the education distribution but they are no different than non-emigrants in terms of unobservable skills. The familiar predictions of the Borjas (1987) model allow me to partially undercover the mechanism driving the selection patterns of Polish emigrants. I contribute to the migrant selection literature by providing additional evidence on how migrants respond to differences in both labour markets and migration policies across countries.

Wage dispersion over the business cycle

In this paper, I provide robust evidence that fluctuations in wage dispersion are independent of the business cycle, while residual wage dispersion, i.e. dispersion of wages within narrowly defined demographic and skill groups of workers, increases during booms and lessens during recessions. Moreover, I show that the procyclical fluctuations in residual wage dispersion are mainly generated by cyclical changes in the upper half of the residual wage distribution.

Sorting On-Line and On-Time

Using proprietary data from a Chilean online job board, we find strong, positive assortative matching at the worker-position level, both along observed dimensions and on unobserved characteristics (OLS Mincer residual wages). We also find that this positive assortative matching is robustly procyclical. Since we use information on job applications instead of final matches, we use the generalized deferred-acceptance algorithm to simulate tentative final allocations. Under all considered scenarios for the algorithm, positive assortative matching is preserved from the application stage to the realized matches.

Which Ladder to Climb? Decomposing Life Cycle Wage Dynamics

Wages grow and become more unequal as workers age. Economic theory focuses on worker investment in human capital, search for employers, and residual wage shocks to account for these life cycle wage dynamics. We highlight the importance of jobs: collections of tasks and duties defined by employers within the production process. We provide empirical evidence that climbing the career ladder toward jobs characterized by more responsibility, complexity, and autonomy accounts for the largest part of life cycle wage dynamics. It accounts for 50% of average wage growth, 50% of rising differences between gender, and virtually all of rising dispersion within gender over the life cycle.

Trade-Induced Job Turnover and Unemployment: The Role of Variable Demand Elasticity

This paper develops an open economy dynamic general equilibrium model to quantify a new mechanism that substantially magnifies trade-induced changes in labor market outcomes. The model features matching frictions in the labor market and variable demand elasticities in product markets. Because openness increases demand elasticities in product markets, it makes firms' employment decisions more responsive to their idiosyncratic shocks. This in turn raises aggregate job turnover, unemployment, and residual wage inequality in steady state. Fitted to Colombian plant-level data, my model explains the rise in these labor market variables that accompanied Colombia's trade liberalization, while a restricted version of the model that imposes constant demand elasticities fails to do so.

Explaining the Unexplained: Residual Wage Inequality, Manufacturing Decline and Low-skilled Immigration

This article investigates whether the increasing ‘residual wage inequality’ trend, which is responsible for most of the wage inequality phenomenon, is related to manufacturing decline and the influx of low-skilled immigrants. The analysis exploits variation across locations in the United States, and shows that a shrinking manufacturing sector increases inequality. This effect strengthens with an influx of low-skilled immigrants. Similar results are found for the increasing return to education and the decline in the employment rate. The evidence suggests that manufacturing decline is producing downward pressure on the relative wages of workers at the low end of the income distribution.