Globalization, Labor Market Restructuring, and Economic Policy

The goal of this project has been to empirically analyze the labor market consequences of globalization and technological change. Below, we provide a summary of some of the academic articles delivered by the project. This work contributes to further our understanding of the functioning of labor markets and provides new insights on how firms and workers are affected by foreign demand shocks. In the paper "Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry" (American Economic Review, revise and resubmit), we quantify the importance of imperfect competition in the U.S. construction industry by estimating the size of rents earned by American firms and workers. To obtain a comprehensive measure of the total rents and to understand its sources, we take into account that rents may arise both due to markdown of wages and markup of prices. We find that American construction firms have significant wage- and price-setting power. This imperfect competition generates a considerable amount of rents, two-thirds of which is captured by the firms. Our theoretical and empirical findings highlight how studies that focus on either the labor market or the product market in isolation may result in a limited or misleading picture of the degree and impacts of imperfect competition and the transmission of shocks to firms and workers. In "Foreign Demand Shocks to Production Networks: Firm Responses and Worker Impacts" (American Economic Review, revise and resubmit), we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions data to study the impacts of foreign demand shocks on firms and workers. We establish three sets of empirical facts about the Belgian economy. First, we find that input purchases respond nearly proportionally to changes in sales, whereas, in contrast, changes in sales are associated with less than proportionate changes in labor costs. These findings are consistent with firms facing fixed overhead costs in labor inputs, whereas intermediate inputs (such as energy and materials) are predominantly variable costs in production. Second, we show that even though direct exporters are rare, most firms are indirectly exporting. This finding points to the importance of incorporating indirect exports through the production network in measuring firms’ ultimate exposure to foreign demand. Third, we show that firms that are more exposed to foreign markets are larger, more productive, and pay higher wages, and that these wage differentials cannot be entirely explained by observed or unobserved differences across workers. This finding suggests it is necessary to depart from the canonical model of a competitive labor market, where wages depend only on the marginal product of workers and not the firm for which they work. In "Facts and Fantasies about Wage Setting and Collective Bargaining" (Journal of Economic Perspectives, 2022), we document and discuss salient features of collective bargaining systems in the OECD countries, with the goal of debunking some misconceptions and myths and revitalizing the general interest in wage setting and collective bargaining. Canonical models of competitive labor markets, monopsony, and search and matching all assume a decentralized wage setting where individual firms and workers determine wages. In most advanced economies, however, it is common that firms or employer associations bargain with unions over wages, producing collective bargaining systems. We show that the characteristics of these systems vary in important ways across advanced economies, with regards to both the scope and the structure of collective bargaining. Drawing on high-quality micro data, we illustrate the "anatomy" of the wage setting in Norway, a small open economy with a two-tier bargaining system. We highlight three sets of empirical findings. First, we show that centrally negotiated base wages act as common wage floors within industries, while the locally negotiated wage drifts produce significant differences in wages across workers depending on the productivity of the firm in which they are employed. The least productive firms pay wages that are approximately equal to their labor productivity, while the most productive firms pay wages that are much lower than labor productivity, earning positive (quasi-)rents on the workers. Second, we find little evidence of a systematic relationship between the wage floors and the average productivity of the industries. This finding can be interpreted as evidence of strong horizontal coordination across industries in Norway's collective bargaining system. Third, we find that while the manufacturing industry has had among the lowest growth rates in productivity, it has been able to retain a high growth in wages. We interpret this as empirical support of a strong influence of export-led pattern bargaining in the Norwegian system of collective bargaining.

This project has resulted in seven academic articles that are either published (three) or accepted for publication (four) in highly ranked economics journals, three working papers with the status "revise and resubmit" in highly ranked economics journals, one working paper close to completion with good prospects for publication, and two popular science publications on economic inequality in Norway (both written in Norwegian). 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 for policy makers (e.g., the Ministry of Finance and Skatteutvalget) and politicians (the Finance Committee). Another important goal of the project 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 Oslo, University of Chicago and University College London, and also by facilitating interaction and collaboration with other leading international scholars.

The goal of this grant proposal is to empirically analyze the labor market consequences of globalization and technological change. The research will further our understanding of how firms, workers, and families are affected by and adapt to globalization and technological change, and how the process of restructuring is shaped by labor market institutions and regulations, tax and transfer policies, family policy, and the education system. Using data from Norway and the U.S., we will carry out three projects, each of which includes specific paper proposals that are described in the application. The first project is focused on labor market adjustments to large changes in trade and immigration, and how the consequences for and responses of firms, workers, and families depend on labor market institutions, regulations, and public policy. The second project is centered on how workers are affected by productivity changes at the firm and industry level, on how the tax and transfer system attenuates the wage and employment effects of such productivity shocks, and on the contribution of firm and industry level productivity shocks and worker mobility to gender differences in earnings levels and earnings variability. The third project is concerned with how workers can insure against negative shocks to employment and earnings by investing in different types of education, and investigates whether gender differences in educational choices translate into lasting differences in returns to education, exposure to labor market risk, and the transferability of skills across jobs and occupations. In each project, the analyses combine theory and credible identification strategies with large administrative datasets that can be linked to supplementary data sources.