brown bag Travail et Économie Publique

Du 08/09/2022 de 12:30 à 13:30

PSE- 48 boulevard Jourdan, 74014 Paris, salle R2-01

SALDARRIAGA Víctor (PSE)

The Distributional Dynamics of Wages Over the Business Cycle

Examining cyclical changes in the wage distribution of the U.S. over 1980-2019, I document three novel facts. In recessions, the wage distribution: (i) becomes more positively skewed, (ii) shrinks at the bottom and widens at the top, and (iii) displays a higher fraction of overall dispersion condensed at the top tail. Contrasting standard views, these facts indicate that wage inequality rises during recessions result from changes at the top rather than at the bottom of the wage distribution. I propose a wage bargaining model incorporating two-sided heterogeneity, aggregate uncertainty, on-the-job search, and targeted recruiting by firms to explain this idea. Over the cycle, firms adjust their recruiting efforts along two margins: the number of vacancies advertised and the skills required to fill these vacancies. In recessions, matches need higher skills from workers to be worth forming, so firms target their vacancies towards high-skill workers. Job offers befall disproportionately more among the high-skilled, improving their bargaining position and preventing wages at the top of the distribution from falling sharply. This mechanism prompts a higher wage inequality. The model reproduces key features of the U.S. labor market and renders a varying distribution of wages that mimics the cyclical patterns observed in the data. I further examine a series of policy interventions and document that, while certain policies, such as increased unemployment insurance, can fix labor market inefficiencies generated by the private behavior of firms, they are less effective in reducing wage inequality in economic downturns.