Seminar 281: International Trade and Finance - "Supply, Demand, Institutions, and Firms: A Theory of Sorting and the Wage Distribution"
Seminar | October 9 | 4-5:30 p.m. | 597 Evans Hall
Abstract: This paper develops and tests a theory of how the supply of skills, labor demand shocks, and minimum wages affect the wage distribution in the presence of firm heterogeneity and imperfectly competitive labor markets. The model features four components: (i) a task-based production function with imperfect substitution across educational groups; (ii) final goods with distinct task requirements, generating differences in demand for skill across firms; (iii) free entry, leading to endogenous responses in the composition of firm types in the economy; and (iv) monopsony power in the labor market, creating firm-level wage premia for ex-ante similar workers. Firm heterogeneity and imperfect competition affect how the wage distribution responds to supply, demand, and institutional shocks via two channels: (i) shifts in the economy-wide distribution of tasks caused by changes in firm composition, generating a secondary demand shock; and (ii) changes in sorting patterns between workers and firms. I estimate the model using Brazilian data and show that it can rationalize different measures of sorting, reduced-form estimates of minimum wage spillovers over the wage distribution, and changes in several forms of wage dispersion: between educational groups, within education between firms, and within education within firms.