We develop a theoretical framework analyzing responsible firms (REFs) that prioritize worker welfare alongside profits in labor markets with search frictions. At the micro level, REFs’ use of market power varies with labor conditions: they refrain from using it in slack markets but may exercise it in tight markets without harming workers. Our macro analysis shows these firms offer higher wages, creating a distinct high-wage sector. When firms endogenously choose worker bargaining power, there is trade-off between worker surplus and employment, though this improves with elastic labor supply. While REFs cannot survive with free entry, they can coexist with profit-maximizing firms under limited competition, where their presence forces ordinary firms to raise wages.
The Importance of Working for Earnest: Climbing the Job Ladder through Firms’ Connectivity
Do workers consider a firm’s “springboard” value in terms of future job opportunities when choosing an employer? Using a search model of the labor market, I introduce the idea that firms differ in enhancing their employees’ chances of receiving external job offers. The model informs a firm-level proxy for outside job offers received by workers. This measure empirically aligns with key model predictions: 1) it negatively correlates with both firm-specific tenure and young workers’ entry salaries, revealing a compensating differential; and 2) it suggests that workers enjoy a salary premium upon leaving such firms, indicative of faster career progression. The model is estimated on administrative data from Italy and successfully captures key aspects of labor market dynamics. My channel explains 10% of the overall job-to-job transitions and shows how firm-induced variation in job search can be a significant driver of inequality, especially at the bottom of the wage distribution.
In a heterogeneous firm economy with monopolistic competition, could informational asymmetries between entrepreneurs and financial intermediaries sometimes improve welfare? We study this question by developing a model where banks finance entrepreneurs under asymmetric information. While aggregate productivity decreases with informational frictions, we find that welfare can be maximized at intermediate levels of information asymmetry due to a trade-off between productivity and product variety. Additionally, moderate input cost distortions can improve welfare when financial frictions are severe by offsetting the resulting weak firm selection.
The Heterogeneous Consequences of Reduced Labor Costs on Firm Productivity
> New version coming soon! | Project selected for the VisitINPS 2020 program
We document how a reduction in labor costs led to heterogeneous effects on manufacturing firms’ total factor productivity (TFP). Leveraging an Italian labor legislation reform and unique institutional features of the local collective bargaining system, we show that such effects vary along the TFP distribution. Relative to the counterfactual, TFP markedly declines on the left tail, which we explain via selection mechanisms; on the right, TFP mildly increases as firms are able to expand and reallocate their workforce. We develop a general equilibrium model featuring firm selection and frictions in input markets to guide the evaluation of welfare implications.
> Project awarded with a Netspar Comparative Research Grant 2021
> Draft available on request
We develop an OLG model with heterogeneous agents and aggregate uncertainty to study optimal Ramsey taxation when the government can use a credible set of social security instruments. Social security mitigates the income effect in optimal labor tax smoothing and, together with heterogeneity, adds new redistributive motives to both labor and capital taxes while crowding out others. We calibrate the model on three different economies: the US, the Netherlands, and Italy. We argue that the three countries would experience heterogeneous gains, in redistributive and efficiency terms, by moving from the status-quo allocations to those prescribed by a utilitarian Ramsey planner. Our simulations show that retirement benefits in the current economies are higher than their Ramsey-optimal level while we argue that the use of funded social security schemes, neglected in current actual policies, could be welfare improving.
In local labor markets, a pattern often emerges where workers transition during the early stages of their careers from lower-paying firms that provide comprehensive training to higher-paying specialized firms that predominantly employ already-trained workers. We refer to this mechanism as the “Human Capital Value Chain” (HCVC). We study and document its impact on the trajectory of workers' wages and local agglomeration externalities, thereby highlighting its role in the broader labor market dynamics.
We revisit the wage decomposition literature by allowing for a non-parametric function of both worker- and firm-level covariates in a wage equation with two-way (worker and firm) fixed effects. We develop theoretical results about the estimation of key covariance components and an application on Portuguese data.