Labor Markets, Firm Behavior and Public Policy

This project is motivated by key challenges facing the Norwegian economy from an expected decline in future oil revenues and aging of the population. It consists of three sub-projects, each investigating alternative adjustments the economy can make to prevent negative long-run consequences of future developments and ensure a sustainable welfare system for future generations. The first project is concerned with the costs and benefits of alternative designs of the tax and transfer system. The second project is focused on the incentives to invest in education and the returns to these investments, from the point of view of individuals and the government. The third project is centered on the causes and consequences of adoption of new technology in firms. Below are summaries of two of the project's recently published working papers. In the paper "Educational Assortative Mating and Household Income Inequality" (Journal of Political Economy, December 2019), we document the degree of educational assortative mating, how it evolves over time, and the extent to which it differs between countries. Our analysis uses data from Denmark, Germany, Norway, the U.K., and the U.S. We find evidence of positive assortative mating at all levels of education in each country. However, the time trends vary by the level of education: Among college graduates, assortative mating has been declining over time, whereas the low-educated are increasingly sorting into internally homogeneous marriages. These findings motivate and guide a decomposition analysis where we quantify the contribution of various factors to the distribution of household income. We find that educational assortative mating accounts for a non-negligible part of the cross-sectional inequality in household income in each country. However, changes in assortative mating over time barely move the time trends in household income inequality. This is because the inequality contribution from the increase in assortative mating among the low educated is offset by the equalizing effect from the decline in assortative mating among the highly educated. By comparison, increases over time in the returns to education generate a considerable rise in household income inequality, but these price effects are partly mitigated by increases in college attendance and completion rates among women. A major difficulty faced by researchers who want to study the consumption and savings behavior of households is the lack of reliable panel data on household expenditures. One possibility is to use surveys that follow the same households over time, but such data are rare and they typically have small sample sizes and face significant measurement issues. An alternative approach is to use the accounting identity that total household spending is equal to income plus capital gains minus the change in wealth over the period. In the paper "What can we learn about household consumption expenditure from data on income and assets?" (Journal of Public Economics, September 2020), we examine the advantages and difficulties of using this accounting identity to construct a population panel data with information on household expenditure. To derive such measures of consumption expenditure, we combine several data sources from Norway over the period 1994-2014. This allows us to link tax records on income and wealth to other administrative data with information on financial and real estate transactions. Using this data, we derive household expenditure from the accounting identity, before assessing the sensitivity of this measure of consumption expenditure to the assumptions made and the data used. We then compare our measures of household expenditure to those reported in expenditure surveys and to the aggregates from national accounts. We also illustrate the research opportunities arising from the derived measures of consumption expenditure through two applications: the first is an examination of how relative wage movements among birth cohorts and education groups affected the distribution of household expenditure, while the second is a study of the transmission of income shocks to household consumption.

This project has resulted in five academic articles published in highly ranked economics journals, one working paper that is accepted for publication, and two working papers with revise and resubmit in highly ranked academic journals. We have also informed the public and policymakers on the results from our studies, by presenting our work extensively at seminars, workshop and conferences, and we have published an academic article in the Norwegian journal Tidsskrift for samfunnsforskning (which is accessible for a wider audience). Another important goal of the proposal has been to promote the quantitative research environment in Norway. This has been achieved in part by strengthening the ties between the research groups at Statistics Norway, University of Chicago and University College London, and also by facilitating interaction and collaboration with other leading international scholars.

This project is motivated by key challenges facing the Norwegian economy from an expected decline in future oil revenues and aging of the population. It consists of three sub-projects, each investigating alternative adjustments the economy can make to prevent negative long-run consequences of future developments and ensure a sustainable welfare system for future generations. The first project is concerned with the costs and benefits of alternative designs of the tax and transfer system. This project will provide empirical evidence on the pass-through from life-cycle earnings shocks into consumption, and the extent to which progressive systems of taxes and income transfers crowd out or add to the self-insurance available through savings, borrowing, and family labor supply. The second project is focused on the incentives to invest in education and the returns to these investments, from the point of view of individuals and the government. In the first part, we provide some of the first evidence on the trade-off between risk and return in an individual's decision to invest in education, taking into account how additional schooling affects life-cycle earnings profiles, earnings volatility, and unemployment risk. Second, we examine whether the value of education to society exceeds the risk-adjusted private return, due to productivity spillovers and fiscal externalities from a more educated labor force. The third project is centered on the causes and consequences of adoption of new technology in firms. In the first part of this section, we examine whether changes to the skill composition of the labor force may help explain patterns over time and across areas in wage inequality, technology investments and firm productivity. The second part investigates whether adoption of new technology in firms can facilitate trade by decreasing information asymmetries and matching frictions between consumers and producers across different countries.