Essays on the U.S. Labor Market

Abstract

The recovery after the great recession has renewed interest in the functioning of labor markets in the U.S. This dissertation emphasizes the importance of higher order moments of the labor markets in several ways. First, I consider models of heterogenous agents. In such models, the entire distribution becomes relevant in determining macroeconomic outcomes. Second, the U.S. labor market shows a distinct pattern of volatility and asymmetry. Existing theoretical models have difficulty replicating this pattern. Using these moments as empirical targets, I develop a new theoretical model of the labor market. The model simultaneously produces more realistic volatility, asymmetry, and correlation of key labor market variables than existing models. Further, more realistic labor market moments then result in more realistic fluctuations in investment. Finally, I document that the real wage has changed from procyclical to countercyclical, and then I consider rising wage inequality as a potential cause. Low wage workers are more sensitive to the business cycle. Therefore, as the mass of low wage worker increases the cyclical behavior of the real wage may change. I show that rising inequality can explain a large proportion of this change.