Research
Working Papers
The Value of Unemployment Insurance: Liquidity vs. Insurance Value [Current Version] [Cleveland Fed WP]
with Kaixin Liu
This paper argues that the value of unemployment insurance (UI) can be decomposed into a liquidity component and an insurance component. While the liquidity component captures the value of relieving the cost to access liquidity during unemployment, the insurance component captures the value of protecting the worker against a potential permanent future income loss. We develop a novel sufficient statistics method to identify each component that requires only the labor supply responses to changes in the potential duration of UI and severance payment and implement it using Spanish administrative data. We find that shutting down the liquidity component decreases the value of UI by 66 percent. However, the relevance of the liquidity channel is highly heterogeneous across different groups of workers. Poorer and wealthier value similarly the liquidity UI provides, but poorer workers value UI more because the insurance channel is crucial for them. On the other hand, wealthier workers and workers with more cash-on-hand value UI equally, but the wealthier value its liquidity, while those with more liquidity care about its insurance value. Finally, we show that while extending the potential duration of Spain's UI would increase welfare, starting a zero-interest rate public loan program of the same cost would be more welfare-improving, even under large default risks.
The Hedgehog’s Curse: Knowledge Specialization and Displacement Loss [Current Version] [Cleveland Fed WP]
with Roberto Pinheiro and Hans Holter
This paper studies the impact of knowledge specialization on earnings losses following displacement. We develop a novel measure of human capital specialization based on how concentrated the knowledge used in an occupation is. Combining our measure with individual labor histories from the NLSY, we show that workers with human capital specialization one standard deviation larger suffer earnings losses 4 to 5 percentage points larger per year following exogenous displacement. A significant part of the negative effect of higher pre-displacement knowledge specialization on post-displacement earnings is driven by the negative impact of knowledge specialization on well-paid outside opportunities.
Estimating Duration Dependence on Re-employment Wages When Reservation Wages Are Binding [Current Version] [Cleveland Fed WP]
with Kaixin Liu
We show that unemployed workers’ wage choices respond to the level of unemployment insurance, indicating that the reservation wages of unemployed job-seekers bind. That is, we use comprehensive Spanish social security data to show that the exhaustion of unemployment benefits causes an immediate 3 percent drop in job-seekers’ re-employment wages. We then derive an estimator of “duration dependence” – the causal effect of unemployment duration on re-employment wages – that accounts for binding reservation wages. Our estimator generalizes and nests the IV estimator of Schmieder et al. (2016). Applied to the Spanish data, our estimator finds that an extra month of unemployment reduces re-employment wages by 0.75 percent in daily wages and 0.23 percent in hourly wages. Finally, we calculate we would underestimate duration dependence by 17 percent if we presumed reservations wages do not bind.
Fear of automation has spiked in the last decade. This paper aims to understand whether machines can replace workers in the labor market and if so, which types of workers are the ones that can be substituted with technology. By exploiting a natural experiment with an instrumental variables strategy that takes advantage of the increase in the relative demand for low-skill labor as a consequence of the shale boom in the US, I find mild evidence of substitutability between low-skill labor and capital in the manufacturing sector. The structure of my data allows me to assess how is best defined low skill labor in this scenario. I find that the strongest conclusions are reached when the definition of high-skill labor includes only those with a college degree or above that level of education.
Work in Progress
Fighting Income Inequality with International Trade [Coming Soon]
with Nicholas Kozeniauskas and Roman Merga
How does international trade affect wage and income distribution across workers? We use detailed employer-employee data from Spain that goes from 1987 to 2004 to answer this question. Our results show that, in contrast with recent economic development in international trade theory, international trade reduces wage and income inequality. Using a new instrumental variable approach to disentangle the effects that trade openness has over the distribution of income and wages, we document 4 effects that international trade has on the labor market. First, an increase in local trade exposure reduces average wages and income; second, it lowers wage and income inequality; third exposure to trade openness generates a reallocation of workers towards small firms and low-skilled jobs; fourth there is a reduction in firm size, when the size of the firm is measured according to their amount of workers. These results are contrary to the findings and predictions of recent models in the literature and to some of the previous empirical findings. The policy implications of these results to mitigate inequality are potentially different than the ones that arise from the standard models, while they raise the question about the mechanism behind and its relevance in other countries.
Positive Selection During the Unemployed Job Search: Nature of Heterogeneity and Limited Predictability [Coming Soon]
with Kaixin Liu
Publications
Social distancing merely stabilized COVID‐19 in the US [STAT] (2020)
with Aaron B. Wagner, Elaine L. Hill, Sean E. Ryan, Ziteng Sun, Grace Deng, Sourbh Bhadane, Peter Wu, Dongmei Li, Ajay Anand, Jayadev Acharya, and David S. Matteson.