Three Essays on Macroeconomics of the Labor Market

Abstract

The three chapters of this thesis investigate the impact of labor market policies on the macroeconomy. The first two chapters look into the impact of labor unions on the economy. The third chapter, coauthored with Edouard Schaal, studies the design of optimal policy in a labor market with adverse selection.

In the first two chapters, I study the impact of unions on wage inequality, out- put and unemployment. To do so, I propose, in chapter two, a search and matching model of union formation in which unions arise endogenously through a voting process within firms. In a union firm, workers bargain their wages collectively. In a nonunion firm, each worker bargains individually with the firm. Because of this wage setting asymmetry, a union lowers the profit of a firm and compresses the wage distribution of the workers. Furthermore, to prevent unionization, nonunion firms distort their hiring decisions in a way that also lowers the dispersion of wages. Chapter three evaluates empirically the impact of the union threat. After being calibrated on the United States, the model shows that, even though a partial equilibrium estimate would predict a small impact of unions on inequality, removing the threat of unionization increases the variance of wages substantially. Completely outlawing unions increases wage inequality further. Moreover, outlawing unions increases welfare and output, and lowers unemployment. These results suggest that, even with a small membership, unions might have a significant impact on the economy through general equilibrium mechanisms and the way they distort firms' decisions.

In the last chapter, we study the design of optimal policies in a frictional model of the labor market with adverse selection. Heterogeneous, risk-averse agents look for a job in a labor market characterized by an aggregate matching technology. Firms post vacancies but cannot observe each agent's productivity. This paper emphasizes the need to take into account general equilibrium effects of labor market policies and focus on the non-observability of workers' underlying skills as the main information friction. Our mechanism design approach shows that the constrained optimal allocation can be implemented by policy instruments such as a non-linear tax on wages, a non- constant unemployment insurance and firm subsidies. We calibrate our model to the US economy and characterize the welfare gains from the optimal policy and its effects on output, employment and the wage distribution. Our findings suggest that the optimal policy under a utilitarian government features a negative income tax, a more generous unemployment insurance for low-skilled workers and higher marginal tax rates, which results in a higher participation in the labor market and a lower unemployment rate. This paper also shows that a government with more egalitarian preferences would favor policies with more European characteristics: heavier taxation and more generous unemployment insurance, which result in a lower output and slightly higher unemployment rate.