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Abstract:
Estimates of the effect of education on GDP (the social return to education) have been hard to reconcile with micro-evidence on the private return. We present a simple explanation that combines two ideas: Imperfect substitution between worker types and endogenous skill-biased technological progress. When types of workers are imperfect substitutes, the supply of human capital is negatively related to its return, and a higher education level compresses wage differentials. We use cross-country panel data on income inequality to estimate the private return and GDP data to estimate the social return. The results show that the private return falls by 1.5 percentage points when the average education level increases by a year, which is consistent with Katz and Murphy's (1992) estimate of the elasticity of substitution between worker types. We find no evidence for dynamics in the private return, and certainly not for a reversal of the negative effect as described in Acemoglu (2002). The short-run social return equals the private return, but the long-run return is two times higher, providing evidence in favour of endogenous technological progress. The rise in education is the major cause of productivity growth over the sample period 1960-90.

Education, inequality, growth

Abstract:
When types of workers are imperfect substitutes, the Mincerian rate of return to human capital is negatively related to the supply of human capital. We work out a simple model for the joint evolution of output and wage dispersion. We estimate this model using cross-country panel data on GDP and Gini coefficients. The results are broadly consistent with our hypothesis of diminishing returns to education. The implied elasticity of substitution fits Katz and Murphy's (1992) estimate. A one year increase in the stock of human capital reduces the rate of return by about 2 percent. The combination of imperfect substitution and skill biased technological change closes the gap between the Mincer equation and GDP growth regressions almost completely.

Abstract:
The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly.

saving and investment, pension funds, private pensions, social security and public pensions, financial institutions

Abstract:
The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly.

Saving and Investment, Pension funds, Private pensions, Social security and public pensions, Financial institutions

Abstract:
Should education be subsidized for the purpose of redistribution? The usual argument against subsidies to education above the primary level is that the rich take up most education, so a subsidy would increase inequality. We show that there is a counteracting effect: an increase in the stock of human capital reduces the return to human capital and, therefore, pre-tax income inequality decreases. We consider a Walrasian world with perfect capital and insurance markets. Hence, in the absence of a strive for redistribution, the market generates the efficient level of investment in human capital. When there is a demand for redistribution, the general equilibrium effects on relative wages might make a subsidy to education an ingredient of a second-best optimal redistribution policy. Stimulating human capital formation results in a compression of the wage distribution, and hence reduces the need for distortionary redistributive taxation. We also study the political viability of education subsidies.

Abstract:
The perpetual inventory method used for the construction of education data per country leads to systematic measurement error. This paper analyses the effect of this measurement error on GDP regressions. There is a systematic difference in the education level between census data and observations constructed from enrolment data. We discuss a methodology for correcting the measurement error. The standard attenuation bias suggests that using these corrected data would lead to a higher coefficient. Our regressions reveal the opposite. We discuss why the measurement error yields an overestimation. Our analysis contributes to an explanation of the difference between regressions based on 5 and on 10 year first differences.

growth, education, measurement error

Abstract:
Do people move to cities because of marriage market considerations? In cities singles can meet more potential partners than in rural areas. Singles are therefore prepared to pay a premium in terms of higher housing prices. Once married, the marriage market benefits disappear while the housing premium remains. We extend the model of Burdett and Coles (1997) with a distinction between efficient (cities) and less efficient (non-cities) search markets. One implication of the model is that singles are more likely to move from rural areas to cities while married couples are more likely to make the reverse movement. A second prediction of the model is that attractive singles benefit most from a dense market (i.e. from being choosy). Those predictions are tested with a unique Danish dataset.

Marriage, search, mobility, city

Abstract:
Though a lot of work has been done on the distribution of job tenures, we are still uncertain about its main determinants. In this paper, we stress random shocks to match productivity after the start of an employment relation. The specificity of investment makes hiring and separation decisions irreversible. These decisions therefore have an option value. Assumptions on risk neutrality, efficient bargaining, and the efficient resolution of hold up problems allow investment and separation decisions to be analyzed separately from wage setting. The tenure profiles in wages implied by the model fit the observed pattern quite well. The model yields a hump shaped pattern in separation rates, similar to learning models, but with a slower decline after the peak. Estimation results using job tenure data from the NLSY support this humped shaped pattern and favor this model above the learning model. We develop a methodology to analyze the decomposition of shocks to match productivity into idiosyncratic and macro-level shocks. When assuming a Last-In-First-Out (LIFO) separation rule, this model of individual employment relations is embedded in a model of firm level employment, that satisfies Gibrat's law. The LIFO rule is interpreted as an institution protecting the property rights on specific investments of incumbent workers against hiring new workers by the firm.

Option Value, Job Tenure, Tenure Profiles

Abstract:
We characterize the equilibrium of a search model with a continuum of job and worker types, wage bargaining, free entry of vacancies and on-the-job search. The decentralized economy with monopsonistic wage setting yields too many vacancies and hence too low unemployment compared to first best. This is due to a business-stealing externality. Raising workers' bargaining power resolves this inefficiency. Unemployment benefits are a second best alternative to this policy. We establish simple relations between the losses in production due to search frictions and wage differentials on the one hand and unemployment on the other hand. Both can be used for empirical testing.

On-the-job search, sorting

Abstract:
We characterize the equilibrium of a search model with a continuum of job and worker types, wage bargaining, free entry of vacancies and on-the-job search. The decentralized economy with monopsonistic wage setting yields too many vacancies and hence too low unemployment compared to first best. This is due to a business-stealing externality. Raising workers' bargaining power resolves this inefficiency. Unemployment benefits are a second best alternative to this policy. We establish simple relations between the losses in production due to search frictions and wage differentials on the one hand and unemployment on the other hand. Both can be used for empirical testing.

assignment, on-the-job search, search frictions, efficiency, optimal UI benefits

Abstract:
We characterize the equilibrium of a search model with a continuum of job and worker types, wage bargaining, free entry of vacancies and on-the-job search. Although on-the-job search reduces the output loss due to frictions, it increases the wage differentials. The decentralized economy with monopsonistic wage setting yields too many vacancies and hence too low unemployment compared to first best, due to a business-stealing externality. Raising workers' bargaining power resolves this inefficiency. Unemployment benefits are a second best alternative to this policy.

assignment, on-the-job search, wage bargaining, sorting

Abstract:
We argue that promoting education may be a means to reduce income equality. When workers of different skill levels are imperfect substitutes in production, an increase in the level of human capital in the economy reduces the return to education and, hence, pre-tax income inequality. The compression of pre-tax wages implies that a given inequality of after-tax incomes can be reached with a less progressive income tax. Optimal redistribution policy faces a trade-off between the distortionary effect of progressive income taxation and the distortions arising from education subsidies. The optimal level of education subsidies crucially depends on the extent to which education compresses the wage distribution, the distortionary effect of progressive income taxation, and the political desire to redistribute income. We discuss empirical evidence showing that the economy's average years of schooling has a strong effect on pre-tax income inequality. We compute for a number of OECD countries the level of education subsidies that could be justified on redistributive grounds. Our argument for education subsidies goes a long way towards explaining the actual pattern and level of education subsidies in OECD countries.

income inequality, optimal taxation, education

Abstract:
I apply Ricardo's principle of comparative advantage for a theory of factor substitutability in a model with a continuum of worker and job types. Highly skilled workers have a comparative advantage in complex jobs. The model satisfies the distance-dependent elasticity of substitution (DIDES) characteristic: substitutability between types declines with their skill distance. I analyze changes in relative wages due to human capital accumulation. The concept of a complexity dispersion parameter or compression elasticity is introduced. Empirical studies suggest its value to be equal to two: a 1 percent increase in the stock of human capital reduces the Mincerian return by 2 percent.

Abstract:
We apply Ricardo's principle of comparative advantage for a theory of factor substitutability. An assignment model with a continuum of worker and job types is applied. Highly skilled workers have a comparative advantage in complex jobs. The model satisfies the Distance Dependent Elasticity of Substitution characteristic: substitutability between types declines with their skill distance. The model is particularly useful for the analysis of the effects of human capital accumulation on relative wages. These effects can be decomposed in composition and extension effects. Composition effects compress the wage distribution. Then, an equiproportional increase in human capital of all skill types compresses the wage distribution, since extension effects cancel in that case. A workhorse model is provided capturing human capital accumulation and skill biased technological progress. Empirical studies suggest a one year rise in the average level of education to reduce the return to human capital by 20%.

assignment, wage distribution, human capital

Abstract:
This paper describes a search model with a continuum of worker and job types, free entry and transferable utility. We apply a second-order Taylor expansion to characterize the equilibrium, derive the "cost of search" and show that it is decreasing in the substitutability of worker types. This cost of search is then decomposed into three components: unemployment, vacancy costs and mismatch. Our contact technology rules out congestion effects between different worker types and, therefore, exhibits increasing returns to scale. One third of those increasing returns in contacts are shown to be absorbed by firms and workers being more choosy. The resulting equilibrium is not efficient. Unemployment benefits can reduce the loss by serving as a search subsidy. Numerical simulations of the model show that our Taylor expansions are quite accurate.

Abstract:
This paper describes a search model with a continuum of worker and job types, transferable utility and an increasing returns to scale contact technology. We apply a second order Taylor expansion to characterize the equilibrium. One third of the increasing returns in contacts are absorbed by firms and workers being more choosy. Hence, strongly increasing returns in contact rates are consistent with weakly increasing returns in matching. The resulting equilibrium is not efficient. Unemployment benefits can reduce the loss by serving as a search subsidy. The loss caused by search frictions is higher when worker types are bad substitutes. Numerical simulations of the model show our Taylor expansions to be quite accurate.

Assignment, Search, Unemployment

Abstract:
This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. Starting point is the observation that within-job log wages for an individual can be described by random walk. We develop a theoretical model based on efficient bargaining, where both log outside wage and log wage in the current job follow a random walk. This setting allows the application of real option theory. We derive the efficient separation rule, which stipulates that workers switch jobs when the difference between the outside wage and the wage in the current job reaches a threshold. The model fits well the observed distribution of job tenures. Since we observe outside wages only at job start and job separation, our empirical analysis of within job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the efficient bargaining hypothesis. The model is estimated on the PSID.

Random productivity growth, efficient bargaining, job tenure, wage growth, wage-tenure profiles, option theory

Abstract:
This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. We develop a theoretical model based on efficient bargaining, where both log outside wage and log wage in the current job follow a random walk, as found empirically. This setting allows the application of real option theory. We derive the efficient separation rule. The model fits the observed distribution of job tenures well. Since we observe outside wages only at job start and job separation, our empirical analysis of within job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the efficient bargaining hypothesis. The model is estimated on the PSID.

random productivity growth, efficient bargaining, job tenure, inverse gaussian

Abstract:
This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. We develop a theoretical model based on effcient bargaining, where both log outside wage and log wage in the current job follow a random walk, as found empirically. This setting allows the application of real option theory. We derive the effcient separation rule. The model fits the observed distribution of job tenures well. Since we observe outside wages only at job start and job separation, our empirical analysis of within job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the effcient bargaining hypothesis. The model is estimated on the PSID.

random productivity growth, efficient bargaining, job tenure, inverse gaussian, wage-tenure profiles, option theory

Abstract:
Can increasing returns to scale in search explain regional differentiation between cities and rural areas? To answer this question, we develop a model of an economy that consists of several regions. Within each region, jobs and workers are heterogeneous by respectively skill and job complexity type. Because of the search frictions, firms and workers in each region must trade-off a better expected match quality against a longer period of non-production. Labor mobility between regions induces the equalization of reservation wages for each skin type and interregional trade of end products yields regional specialization in production. The model predicts that high density areas make use of their scale advantage by producing end products with a high dispersion of skin requirements. Empirical evidence for the United States corroborates the implications of the model.

Search, assignment, new regional economics, agglomeration

Abstract:
Is moving to the countryside a credible commitment device for couples? We investigate whether lowering the arrival rate of potential alternative partners by moving to a less populated area lowers the dissolution risk for a sample of Danish couples. We find that of the couples who married in the city, the ones who stay in the city have significant higher divorce rates. Similarly, for the couples who married outside the city, the ones who move to the city are more likely to divorce. This correlation can be explained by both a causal and a sorting effect. We disentangle them by using the timing-of-events approach. In addition we use information on father's location as an instrument. We find that the sorting effect dominates. Moving to the countryside is therefore not a cheap way to prolong relationships.

Dissolution, search, mobility, city

Abstract:
Is moving to the countryside a credible commitment device for couples? We investigate whether lowering the arrival rate of potential alternative partners by moving to a less populated area lowers the dissolution risk for a sample of Danish couples. We find that of the couples who married in the city, the ones who stay in the city have significant higher divorce rates. Similarly, for the couples who married outside the city, the ones who move to the city are more likely to divorce. This correlation can be explained by both a causal and a sorting effect. We disentangle them by using the timing-of-events approach. In addition we use information on father's location as an instrument. We find that the sorting effect dominates. Moving to the countryside is therefore not a cheap way to prolong relationships.

dissolution, search, mobility, city

Abstract:
This paper shows that we can normalize job and worker characteristics such that without frictions there exists a linear relationship between wages on the one hand and worker and job type indices on the other. However, for five European countries and the US we find strong evidence for a systematic concave relation. An assignment model with search frictions provides a parsimonious explanation for our findings. This model yields two restrictions on the coefficients that fit the data well. Allowing for unobserved heterogeneity and measurement error we find that reservation wages are 25% lower than they would be in a frictionless world. Our results relate to the literature on industry wage differentials and on structural identification in hedonic models.

Abstract:
This paper presents strong evidence for the concavity of wages in job and worker characteristics by adding second order terms to a Mincerian earnings function for 6 OECD countries. Under a standard normality assumption, this concavity cannot be attributed to unobserved components in those characteristics. An assignment model with search frictions provides a parsimonious explanation for our findings. This model yields two restrictions on the coefficients which fit the data very well. The impact of search frictions on wages is large. Our results relate to the literature on industry wage differentials, on structural identification in hedonic models, and on wage posting versus Nash bargaining in search models.

wages, search, assignment

Abstract:
Recent research has shown the reduction in the minimum wage to be the main cause of the rise in wage dispersion in the lower half of the wage distribution in the US during the 1980s. However, the return to human capital does not seem to have been much affected. Using new methodology this paper confirms previous conclusions regarding the wage distribution but shows that the return to human capital has also increased strongly. A 10% reduction of the minimum wage causes the wage of someone earning the previous minimum to fall by 8%: evidence in favour of a DIstance-Dependent Elasticity of Substitution (DIDES) production function.

Abstract:
The perpetual inventory method used for the construction of education data per country leads to systematic measurement error. This paper analyzes the effect of this measurement error on GDP regressions. There is a systematic difference in the education level between census data and observations constructed from enrollment data. We discuss a methodology for correcting the measurement error. The standard attenuation bias suggests that using these corrected data would lead to a higher coefficient. Our regressions reveal the opposite. We discuss why the measurement error yields an overestimation. Our analysis contributes to an explanation of the difference between regressions based on 5 and on 10-year first-differences.

Growth, education, measurement error

Abstract:
We explore the role of firms in insuring risk-averse workers. As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the spot market if workers are sufficiently risk averse and the firm can base incentive payments on good information. Competition, however, may allow the spot market and explicit contracts to crowd out implicit insurance provided by the firm, even though the latter yields higher welfare. We explain why different governance structures coexist in quite homogeneous industries.

Insurance, implicit contracts, moral hazard, principal agent, commitment, shirking

Abstract:
The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory, we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed, equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly.

Abstract:
In many countries, student grants, tuition fees, and subsidized loans depend on parental income. This paper examines the efficiency and distributional effects of such conditioning, and assesses whether it is optimal practice when the government wants to reduce after-tax income inequality in the most efficient manner. Increasing the mean level of education among the work-force compresses wage differentials by level of education and thereby the pre-tax income distribution. Hence, subsidizing education may be part of an optimal redistribution policy. However, education subsidies mainly benefit high-ability students, limiting their redistributive virtues. Conditioning education subsidies on parental income may enable the government to reduce inframarginal subsidies, mainly benefiting high-ability students, while preserving the marginal subsidy, and thus the favourable effect on the mean education level which leads to wage compression.

Abstract:
While the employment effects of minimum wages are usually reported to be small (suggesting low substitutability between skill types), direct estimates suggest a much larger degree of substitutability. This article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories. An assignment model is applied where skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the United States show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out likewise can be applied to other markets where different quality types are close substitutes, such as the housing market.