Essays on Labor Market Mechanisms

This dissertation studies the interaction between job stability and labor markets. Chapter 1 studies the impact of firm turnover and job recall on wages. I start this chapter with an empirical contribution. I demonstrate the importance of recall and turnover for employment dynamics and wages using matched employer-employee data from Brazil. First, I document large dispersion of job-destruction rates and recall rates across sectors. Second, I show that after controlling for worker and firm characteristics, sectors with greater job instability (an inverse measure of tenure that controls for recall) pay more. To explain this finding I construct a multi-sector closed economy version of Mortensen and Pissarides (1994) with directed search and heterogeneous recall rates as well as heterogeneous layoff rates across sectors. Once I have estimated the model's parameters using the data, I then conduct the main experiment which is to assess the impact of Brazil's recall restrictions on employment dynamics. The Brazilian government bans recalls within 3 months of the date of firing. I simulate the imposition of this law, and I find that this restriction on recall activity decreases the employment rate significantly in aggregate, but the impact is very heterogeneous across sectors. Chapter 2, studies wage inequality and job stability. I start this chapter with a data motivation where I use matched employer-employee data to establish that separations are disproportionately comprised of layoffs for low wage workers, not separations due to job-to-job transitions. Secondly, I show that existing models such as Burdett and Coles (2003) and Shi (2009) are inconsistent with this fact since they assume that the exogenous component of job destruction is constant across firms, and low wage workers search on-the-job much more intensely than high wage workers. To explain this fact, I develop a new model that takes into account the disproportionate share of layoffs among low wage workers. I show that after correctly matching the wage/layoff relationship, the introduction of a 30% `firing cost' results in nearly twice as much wage inequality as compared to a model with a homogeneous firing rate across firms