Research

Abstract: Over the last 40 years, job-to-job mobility of workers has substantially decreased, altering the distribution of workers' tenure within the firm. In this paper I show that this change in workers' tenure affects the responsiveness of wages to the profitability of the firm as measured by value-added (i.e., the difference between revenue and cost of goods sold). Using matched worker-firm data from Norway, I estimate rent-sharing elasticities—which measure the percentage change in the worker's wage corresponding to a one percentage change in the firm's value-added—by using internal panel instruments and show that there is substantial heterogeneity in the response of workers' earnings to changes in firms' value-added by worker tenure. Over twenty years of tenure, the estimated rent-sharing elasticity declines by approximately 50 percent. Shorter-tenured workers are also more likely to experience separations as a result of the change in value-added. I show that these differences cannot be explained by selection on observable characteristics in the sample of long-tenured workers. To quantify the role of unobserved differences in skill and worker mobility by tenure, I develop a model with firm-specific human capital, on-the-job search, bargaining over match surplus, and firm-level shocks to productivity. I find that the pressures of firm-specific human capital and resulting differences in workers' mobility by tenure—due to differences in the opportunity cost of leaving the firm—can account for approximately 20 percent of the decline in the rent-sharing elasticity.

Abstract: While many employees risk losing their job and having their career disrupted due to employers' financial distress, it is widely recognized that many leave their employer in anticipation of layoff. In this paper, we assess how employees' costs of financial distress depend on employees learning and acting on future layoff risk. To this end, we use random assignment of bankruptcy judges as an instrument for employer shutdown and administrative data on petition and quit dates to examine how earnings costs are shaped by employee reallocation. We show that shutdown causes a 24% fall in earnings over a five-year period despite one-quarter of employees having already left their firm. We document substantial heterogeneity in reallocation and earnings losses, typically displaying an inverse relationship, with higher reallocation in strong labor markets and from high-wage firms. The reallocation attenuates earnings losses by about 50%, approximately equal to the insurance from taxes and transfers. To assess the value of information, we estimate a model where risk averse workers learn about distress, search for jobs and access public insurance. Using the model, we calculate that employees' willingness to pay for their current job increases by 14% when the firm is liquidated without any advance information. Our findings suggest that making firms' financial risk information more accessible to employees can yield important benefits.

Abstract: A growing body of research in economics has established that demand-side frictions, such as binding hours constraints, shape labor supply decisions. While these findings may have important distributional and efficiency implications for tax policy, there is currently no evidence on the role of hours frictions in shaping labor supply responses to financial incentives. In this paper, we develop a new framework that allows us to quantify the prevalence of hours frictions and their contribution to overall responses to tax incentives. To this end, we develop a theory and prove that under reasonable assumptions about the disutility of work, it is never optimal to stop working mid-year except when facing hours constraints. The key to our empirical approach is the existence of cumulative incentives, based on year-end earnings, and access to monthly earnings data. We show that (i) a "missing (mass of) work"—i.e., extensive margin responses—around non-linearities in tax schedules identifies the prevalence of hours frictions, and (ii) our framework allows us to establish a lower bound on the unconstrained earnings response to incentives. We apply our framework using monthly earnings data and discontinuities in the Norwegian tax and transfer system. Overall, we find that one-half to two-thirds of workers face hours frictions. While the prevalence is higher among hourly workers, contractors, and those in professional services, male and low-skilled workers face more severe constraints, measured as the fraction who stop working before November. At higher income levels, we find hours frictions play a less significant role. We calibrate the model to match our key findings and quantify the welfare costs of hours constraints.