Skill Acquisition and the Dynamics of Trade-Induced Inequality (Job Market Paper)
This paper quantifies the impact of a trade liberalization on wage inequality between workers of different skill levels and across age cohorts. I propose a theory in which trade liberalization increases the demand for skill due to production share reallocation and technology switching. However, unlike in the existing literature, I endogenize the skill supply by supplementing the skill demand side of the model with an overlapping generations model of skill acquisition. I calibrate the model to 2007 US data and simulate the economy's entire equilibrium transition path in response to the removal of policy trade barriers. Workers have rational expectations and must take into account the general equilibrium effects on wages of changes in skill supply during the economy's transition. I find that the aggregate gains from trade liberalization, defined as the increase in discounted real earnings compared to pre-liberalization, are approximately 5.9%. However, these gains are not distributed evenly among workers. For those alive at the time of implementation of the new trade policy, the oldest educated workers real discounted lifetime earnings increase by 9.9% while the oldest uneducated workers' real discounted lifetime earnings increase by only 1.5%. Ignoring the economys transition leads to an understatement of trade-induced inequality as this does not account for transitory inequality, while ignoring the endogeneity of the skill supply leads to an overstatement of trade-induced inequality.
A Pareto-Improving Minimum Wage (with Leif Danziger) (Revision requested and submitted to Economica)
This paper shows that a graduated minimum wage, in contrast to a constant minimum wage, can provide a Pareto improvement over what can be achieved with an optimal income tax. The reason is that a graduated minimum wage requires high-productivity workers to work more to earn the same income as low-productivity workers, which makes it more difficult for the former to mimic the latter. In effect, a graduated minimum wage allows the low productivity workers to benefit from second-degree price discrimination which increases their income.
The Optimal Graduated Minimum Wage (with Leif Danziger)
This paper introduces a graduated minimum wage in a model with a government that seeks to maximize social welfare. It shows that the optimal graduated minimum wage always increases the low-productivity workers’ consumption and brings it closer to the first-best. The paper also describes how the minimum wage in a social welfare optimum depends on important economy characteristics such as the government’s revenue needs and the productivities of the different types of workers.
Research Papers in Progress
Inequality Dynamics and Trade: The Role of General and Specific Human-Capital Acquisition
In this paper, I study the implications of trade liberalization when the supply of both general and sector-specific human capital are endogenous. I consider a multi-sector setting in which workers endogenously accumulate general skills by acquiring an education and sector-specific skills by undertaking on-the-job training. Trade liberalization induces both changes in the relative demand for general skills due to within-sector reallocations and the relative demand for sector-specific skills due to between-sector reallocations. The model facilitates the study of how trade liberalization affects inequality between education groups, across sectors and across age groups along the economy's transition path.
Skill Acquisition with Rational Expectations vs. Myopic Behavior
In this paper, I study how predictions for wage inequality depend on whether workers have rational expectations or are myopic. To this end, I build an overlapping-generations model of skill acquisition. I use the model to quantify the effects of a change in relative skill demand on worker welfare and inequality under the assumption of rational expectations and under the assumption that workers are myopic.