Essays in labor economics

This thesis titled “Essays in Labour Economics” is comprised of three essays investigating various determinants of earnings inequality. Chapter 1 provides a novel explanation for labor market polarization—the rise in employment shares of high and low skill jobs at the expense of middle skill jobs, and the fall in middle-skill wages. We argue that recent and historical episodes of polarization resulted from increased automation. In our theoretical model, firms deciding whether to employ machines or workers in a given task weigh the cost of using machines, which is increasing in the complexity (in an engineering sense) of the task, against the cost of employing workers, which is increasing in training time required by the task. Some tasks do not require training regardless of complexity, while in other tasks training is required and increases in complexity. In equilibrium, firms are more likely to automate a task that requires training, holding complexity constant. We assume that more-skilled workers learn faster, and thus it is middle skill workers who have a comparative advantage in tasks that are most likely to be automated when machine design costs fall. In addition to explaining job polarization, our model makes sense of observed patterns of automation and accounts for a set of novel stylized facts about occupational training requirements. Chapter 2 establishes a novel source of wage differences among observationally similar high skill workers. We show that degree class — a coarse measure of performance in university degrees — causally affects graduates’ earnings. We employ a regression discontinuity design comparing graduates who differ only by a few marks in an individual exam, and whose degree class is thus assigned randomly. A First Class is worth roughly three percent in starting wages which translates into £1,000 per annum. An Upper Second is worth more on the margin—seven percent in starting wages (£2,040). In addition to identifying a novel source of luck in the determination of earnings, our findings also show the importance of simple heuristics for hiring decisions. Chapter 3 asks whether public policy affects the degree of intergenerational transmission of education. The chapter investigates this question in the context of secondary school transitions in Germany. During the last three decades, several German states changed the rules for admission to secondary school tracks. Combining a new data set on transition rules with micro data from the German Socioeconomic Panel (SOEP), I find that allowing free track choice raises the probability of attending the most advanced track by five percentage points. However, the effect is twice as large for children of less educated parents. The results suggest that the correlation between parents’ and children’s educational attainment may be reduced by more than one third when no formal restrictions to choosing a secondary school track exist