Working Papers

Match Quality, Contractual Sorting and Wage Cyclicality

Nov 5, 2018

With
João Alfredo Galindo da Fonseca and Yaniv Yedid-Levi

Abstract
This paper studies the role of match quality for contractual arrangements, wage dynamics and workers’ retention. We develop a model in which profit maximizing firms offer a performance-based pay arrangement to retain workers with relatively high match-specific productivity. Key implications of our model hold in data from the NLSY79, where information about job histories and performance pay is available, suggesting that match quality affects both pay arrangements and employment durations. Contractual sorting appears to play an important role in determining the cyclicality of wages.

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Citation

@techreport{fgy2018contracts,
  title={Match Quality, Contractual Sorting and Wage Cyclicality},
  author={Galindo da Fonseca, Joao and Gallipoli, Giovanni and Yedid-Levi, Yaniv},
  year={2018},
  note = {Working Paper},
  institution={UBC, Vancouver School of Economics}
}

Human Capital Inequality: Empirical Evidence

Sep 23, 2018

With
Brant Abbott

Abstract
Wealth inequality has received considerable attention, with mounting evidence of steady and economically meaningful changes in the concentration of wealth ownership. By definition, wealth inequality captures disparity in the ownership of productive capital and other non-labor factors of production. In contrast, in this article we focus on the distribution of human capital and its implications for the accrual of economic resources to individuals and households. Human capital inequality can be thought of as measuring disparity in the ownership of labor factors of production, which are usually compensated in the form of wage income.

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Citation

@techreport{AG_HC2018,
  title={Human Capital Inequality: Empirical Evidence},
  author={Abbott, Brant and Gallipoli, Giovanni},
  year={2018},
  note={Working Paper},
  institution={Vancouver School of Economics, UBC}
  }

Piercing the “Payoff Function” Veil: Tracing Beliefs and Motives

Sep 19, 2018

With
Guidon Fenig, Yoram Halevy

Abstract
This paper develops an experimental methodology that allows the identification of decision-making processes in interactive settings using tracking of non-choice data. This non-intrusive and indirect approach provides essential information for the characterization of beliefs. The analysis reveals significant heterogeneity, which is reduced to two broad types, differentiated by the importance of pecuniary rewards in agents’ payoff function. Most subjects maximize monetary rewards by best responding to beliefs shaped by recent history. Others are able to identify profit-maximizing actions but choose to systematically deviate from them. The interaction among different types is key to understanding aggregate outcomes.

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Citation

@techreport{FGH1_2019,
  title={Piercing the ``Payoff Function'' Veil: Tracing Beliefs and Motives},
  author={Fenig, Guidon and Gallipoli, Giovanni and Halevy, Yoram},
  year={2018},
  note={Working Paper},
  institution={University of Toronto}
  }

Permanent-Income Inequality

Apr 26, 2018

With
Brant Abbott

Abstract
We estimate the level and evolution of inequality in assets, human capital wealth and permanent income. Our definition of the latter variable does not rely on a specific utility function and imposes no restrictions on income processes. We characterize the distribution of human wealth using nonparametric identification results that allow for state-dependent stochastic discounting and unobserved heterogeneity. Accounting for the value of human capital delivers a different view of inequality. We find that (i) in 2016 the top 10\% shares of total wealth and permanent income were roughly 1/3 lower than the corresponding share of assets; (ii) between 1989 and 2016 the top 10\% shares of total wealth and permanent income grew significantly faster than the corresponding share of asset wealth. Hence, human wealth has had a mitigating influence on overall inequality but this mitigating effect has declined over time. We show that households at the top of the assets distribution have not increased their share of human wealth. Instead, higher concentration of permanent income is due to the growing importance of assets in lifetime wealth portfolios.
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Citation

@techreport{abbott-gallipoli-2018PI,
  title={Permanent-Income Inequality},
  author={Abbott, Brant and Gallipoli, Giovanni},
  year={2018},
  institution={University of British Columbia}
}

Markov-Chain Approximations for Life-Cycle Models

May 3, 2017

With
Giulio Fella, Jutong Pan

Abstract
Non-stationary income processes are standard in quantitative life-cycle models, prompted by the observation that within-cohort income inequality increases with age. This paper generalizes Tauchen (1986) and Rouwenhorst’s (1995) discretization methods to non-stationary AR(1) processes. We evaluate the performance of both methods in the context of a canonical finite-horizon, income-fluctuation problem with a non-stationary income process. We find that the generalized Rouwenhorst’s method performs extremely well even with a relatively small number of states.

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Citation

@techreport{fgp2017approximations,
  title={Markov-Chain Approximations for Life-Cycle Models},
  author={Fella, Giulio and Gallipoli, Giovanni and Pan, Jutong},
  year={2017},
  note = {Working Paper},
  institution={UBC, Vancouver School of Economics}
}

Revisiting the Relationship Between Unemployment and Wages

Jul 15, 2016

With
Joao Galindo da Fonseca and Yaniv Yedid-Levi

Abstract
We investigate the empirical relationship between wages and labor market conditions. Following work histories in the NLSY79 we document that the relationship between wages and unemployment rate differs across occupations. The results hold after controlling for unobserved match quality. This suggests that evidence about history-dependence of wages obtained from pooled samples conceals significant differences and provides an imprecise description of earning dynamics. We examine these discrepancies and offer new evidence suggesting that the sensitivity of wages to current unemployment is linked to the prevalence of performance pay.

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Citation


Social Security, Endogenous Retirement and Intra-household Cooperation

Sep 16, 2013

With
Laura Turner

Abstract
This paper studies the retirement incentives induced by the U.S. Social Security system in a framework which allows for different degrees of cooperation and strategic interaction between spouses. We develop a model in which spouses maximize joint household utility, subject to the additional constraint that neither partner  finds it optimal to deviate from the best constrained household allocation. We show that accounting for \non- cooperative” behavior through this additional constraint can rationalize various choices of older couples observed in the 1932-42 cohort of the Health and Retirement Study. Non-cooperative behavior helps with two puzzles in the retirement literature:  (i) the clustering of benefit claiming at age 62 despite significant gains associated to delayed claiming by husbands; and (ii) the joint benefit claiming of couples. We contrast our  findings to those from a unitary model of the household, extended to include a process for declining health, and show that the latter can rationalize neither early nor joint claiming behavior if individuals can independently make benefit and labor force participation decisions.

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Citation

@techreport{turner2008social,
  title={Social Security, endogenous retirement and intrahousehold cooperation},
  author={Turner, Laura and Gallipoli, Giovanni and others},
  year={2013},
  institution={UBC Working paper}
}

Non-Convexities in Dynamic Programming Problems

Sep 1, 2013

With
Lars Nesheim

Abstract
Models where agents choose over non-convex budget sets are commonly used in the analysis of economic problems with extensive margin decisions and  fixed costs. Their solutions have interesting and distinctive features that are especially relevant in quantitative applications.  We describe how problems with non-convex choice sets differ from standard problems and investigate under which circumstances the inclusion of random shocks makes their solution identical to the solution of standard problems. A simple framework is provided for the analysis of these problems and a numerical example is illustrated.

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Citation

@article{gallipoli2008non,
  title={Non-convexities in dynamic programming problems},
  author={Gallipoli, Giovanni and Nesheim, Lars},
  year={2013}
}

How Robust is the Skill-Dispersion-Complementarity Hypothesis?

Aug 1, 2013

With
Matilde Bombardini and German Pupato

Abstract
We explore the robustness of the hypothesis, First put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer benefits from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.

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Citation

@misc{bombardini2015robust,
  title={How Robust is the Skill-Dispersion-Complementarity Hypothesis?},
  author={Bombardini, Matilde and Gallipoli, Giovanni and Pupato, Germ{\'a}n},
  year={2015}
}

Household Responses to Individual Shocks: Disability and Labour Supply

Jun 6, 2011

With
Laura Turner

Abstract
How do people respond to idiosyncratic shocks? Using longitudinal data from the Canadian Survey of Labour and Income Dynamics we use variation in health status to develop and estimate a life cycle framework which rationalizes observed responses of individuals and couples to disability shocks. Two puzzling findings associated with disability onset motivate our work: (1) the almost complete absence of added worker e effects within households and, (2) the fact that single workers’ labor supply responses to disability shocks are larger and more persistent than those of married workers. We argue that these facts are consistent with optimal life cycle behavior when we account for the interaction of two mechanisms: first, a dynamic human capital accumulation motive linking wages to labor supply; second, the ability of spouses to transfer time through home production. We provide evidence supporting the empirical relevance of both these mechanisms and show that dynamic labor supply decisions depend crucially on the interaction of the two. Our findings suggest that the persistence of measured wage shocks may be in part a by-product of optimal individual responses.

DRAFT (PDF)

Citation

@article{gallipoli2009household,
  title={Household Responses to Individual Shocks: Disability and Labour Supply},
  author={Gallipoli, Giovanni and Turner, Laura},
  year={2009}
}