Essays on the Macroeconomics of the Labor Market

This dissertation comprises three essays on the macroeconomic implications of the labor market dynamics and labor market policies. Chapter 1 “Unemployment Risk and Entrepreneurship”: Understanding the decision of individuals to become a new entrepreneur has long been an important topic among economists. Empirically, I find that (i) unemployed individuals are more likely to become an entrepreneur compared to the employed, and (ii) in response to increasing unemployment rate, the propensity to become entrepreneurs increases for employed workers but decreases for unemployed individuals. To explain these findings, I build an equilibrium search model of entrepreneurship and unemployment with endogenous job destructions. Entry decision into entrepreneurship is affected by an opportunistic effect and a separation effect, which is strengthened by surging unemployment risk in recessions. I show that the unemployment rate during the Great Recession would have been two percentage points higher if separation-induced entry is absent in the model. Also, unemployment benefits can be beneficial to the economy by inducing more nascent entrepreneurs from employment. A self-employment subsidy can boost the aggregate output as well. Finally, a decline in labor share would discourage entry from employment resulting in a smaller average firm size. Chapter 2 “Inefficient Unemployment and Bargaining Friction”: This chapter explores the possibility of privately inefficient job separations due to bargaining friction and its implications for the unemployment dynamics. I propose a simple specification of bargaining friction by including bargaining wedges in the standard Nash bargaining model. Such bargaining wedge arises when, for example, wages are determined by alternating offers bargaining, which is often used in the literature to generate real wage rigidity, or when there is asymmetric information about worker’s productivity. I show that due to the misalignment between actual surpluses and bargaining surpluses, inefficient separations could be generated which would in turn induce inefficient unemployment. The existence of inefficient unemployment due to bargaining friction could potentially explain the excessive fluctuation of unemployment observed in the data. Quantitatively, I find that inefficient unemployment constitutes up to 54% of the total unemployment volatility in the calibrated model. Chapter 3 “Minimum Wage in a Search and Matching Model with Worker and Task Substitutions” (joint with Ping Wang): While minimum wage policy is widely adopted in the real world, can it effectively raise the average wage of lower paid jobs without having large detrimental consequences for employment? The empirical literature fails to establish robust findings. We develop a general-equilibrium search and wage-posting framework with heterogeneous workers and tasks matching in multi-tier labor markets: abstract, routine high-skilled, routine middle-skilled, manual middle-skilled and manual low-skilled. We incorporate rich cross-market spillovers and compositional effects from individual responses to market thickness. As a result of minimum wage hikes, we show that (i) the unemployment rate at the minimum wage binding market is higher, while all other markets enjoy a lower unemployment rate; (ii) employment in the manual low-skilled jobs is lower, whereas employment in the routine high-skilled and manual middle-skilled markets is higher due to cross-market substitutions; and, (iii) employment in other markets has ambiguous responses due to conflicting effects on potential worker entry and unemployment. By calibrating the model to fit the U.S. data, we evaluate the impacts of the federal minimum wage hike (2007-2009) and the ongoing minimum wage increase in Seattle (2017-2021). We find that the minimum wage effects on employment on the binding markets depend crucially on the magnitudes of spillover and compositional effects, and that the employment effects may be weak in a nonbinding market. Moreover, our results suggest that, while both minimum wage hikes reduce aggregate employment and output, they only generate small effects on submarket average and overall average wages