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Report
Tax smoothing with redistribution
We study optimal labor and capital taxation in a dynamic economy subject to government expenditure and aggregate productivity shocks. We relax two assumptions from Ramsey models: that a representative agent exists and that taxation is proportional with no lump-sum tax. In contrast, we capture a redistributive motive for distortive taxation by allowing privately observed differences in relative skills across workers. We consider two scenarios for tax instruments: (i) taxation is linear with arbitrary intercept and slope; and (ii) taxation is non-linear and unrestricted as in Mirrleesian ...
Journal Article
State of the union
Working Paper
What are the short-run effects of increasing labor market flexibility?
This paper evaluates the short-run effects of introducing labor market flexibility to an economy characterized by large firing taxes. Different reforms are considered: 1) eliminating all firing taxes, 2) introducing flexible new contracts while retaining the firing taxes on workers employed previous to the reform, and 3) introducing temporary contracts. The paper finds that eliminating all firing taxes increases the unemployment rate much more in the short run than in the long run, that introducing new flexible contracts has similar effects as eliminating all firing taxes, and that ...
Report
Labor contracts in a model of imperfect competition
We propose a definition of involuntary unemployment which differs from that traditionally used in implicit labor contract theory. We say that a worker is involuntarily unemployed if the marginal wage implied by the optimal contract exceeds the marginal rate of substitution between leisure and consumption. We construct a model where risk-neutral firms have monopoly power and show that such monopoly power is necessary for involuntary unemployment to arise in the optimal contract. We numerically compute examples and show that such unemployment occurs for a wide range of parameter values.
Report
Early contract renegotiation: An analysis of U.S. labor contracts from 1970 to 1995
This paper examines the ex post flexibility of U.S. labor contracts during the 1970-95 period by investigating whether unanticipated changes in inflation increase the likelihood of a contract being renegotiated prior to its expiration. We find strong empirical support for this hypothesis. Specifically, our results indicate that renegotiations are triggered principally by large and infrequent price shocks of either sign. When combined with evidence that ex ante contract durations are shorter during episodes of increased inflation uncertainty, our results suggest that these contracts are ...
Report
Uncertainty and labor contract durations
This paper provides an empirical investigation into the relationship between ex ante U.S. labor contract durations and uncertainty over the period 1970 to 1995. We construct measures of inflation uncertainty as well as aggregate nominal and real uncertainty. The results not only corroborate previous findings of an inverse relationship between contract durations and inflation uncertainty, but also document that this relationship extends to both measures of aggregate uncertainty. We also explore the robustness of this relationship to various measures of inflation uncertainty that have appeared ...
Working Paper
What Can We Learn from Asynchronous Wage Changes?
I document eight novel facts about wage changes and provide a theoretical framework to rationalize them. I then illustrate how this new treatment of data and theoretical framework speak to important secular and cyclical features of the macroeconomy. The evidence put forth in this paper, suggests that a theory of wage setting in which wages respond to idiosyncratic competition is an important complement to the more conventional macroeconomic view in which wage rigidity is induced by deliberately divorcing the timing of wage changes from innovations in firms' and workers' opportunities.
Working Paper
When should labor contracts be nominal?
This paper proposes a theory of when labor contract should be nominal or, instead, indexed. We find that, contracts should be indexed if prices are difficult to forecast and nominal otherwise. We use a principal-agent model developed by Jovanovic and Ueda (1997), with moral hazard, renegotiation, and where a signal (the nominal value of the sales of the agent) is observed before renegotiation takes place. We show that their result, that the optimal contract is nominal when agents must choose pure strategies, is robust to the case where agents can choose mixed strategies in the sense that, for ...
Working Paper
When should labor contracts be nominal?
We propose a theory to explain the choice between nominal and indexed labor contracts. We find that contracts should be indexed if prices are difficult to forecast and nominal otherwise. Our analysis is based on a principal-agent model developed by Jovanovic and Ueda (1997) in which renegotiation can take place once the nominal value of the agent's output is observed. Their model assumes that agents use pure strategy, with the strong result that only nominal contracts can be written without being renegotiated. But, in reality, we do observe indexed contracts. We resolve this weakness of their ...
Working Paper
What Can We Learn from Idiosyncratic Wage Changes?
I document six facts about wage changes. First, most pay revisions occur at yearly frequency, but a small proportion occur at idiosyncratic times. Second, idiosyncratic pay changes are larger and more dispersed than year-end pay changes and resemble more pay changes occurring at job-to-job transitions. Third, idiosyncratic pay changes are more common for workers with less experience and, forth, in firms higher on the job-ladder. Fifth, industries in which the incidence of idiosyncratic raises have risen have experienced greater declines in labor share. Sixth, industries in which more firms ...