Job Market Paper
Best Paper Award, Royal Economics Society Junior Symposium
This paper uses a historic natural-experiment to test the superstar theory of rising top incomes. I use a tractable model of superstar effects to differentiate superstar effects from conventional models of labor demand. The superstar model yields distinctive predictions about wage changes during a period of expanding market reach of workers. To test the model empirically, I study a quasi-experiment during the sharp increase in market reach in the entertainment sector that occurs during the roll-out of TV in the mid 20th century. A period of local TV filming allows me to leverage the staggered local deployment of TV stations for a differences-in-differences analysis across local labor markets. I use an exogenous interruption of the roll-out process to test for spurious trends or local demand shocks. My results show that the effects of greater market reach closely align with the predictions of the superstar theory. Wages at the top rise sharply, simultaneously earning differences at the top widen, mid-income jobs disappear and total entertainer employment falls. The setting allows me to use an IV strategy to quantify the magnitude of superstar effects. I find that superstar effects lead to a 17% rise in the 99th percentile of wages when workers' market reach doubles. This IV estimate of the key model parameters implies that superstar effects are 2/3 of the size implied by an OLS estimate. Finally, I find evidence that intensifying competition for talent is driving the rise in top income concentration, while a lack of competition mutes the effects.
- Reservation Wages and the Wage Flexibility Puzzle (joint with Alan Manning and Barbara Petrongolo)
Wages are only mildly cyclical, implying that shocks to labour demand have a large short-run impact on unemployment, at odds with the quantitative predictions of the canonical search model. We emphasize the role of reservation wages in wage cyclicality and argue that reference-dependence in reservation wages can reconcile model predictions and empirical evidence on the cyclicality of both wages and reservation wages. We provide evidence that reservation wages significantly respond to backward-looking reference points, as proxied by rents earned in previous jobs. We also argue that other proposed solutions to the unemployment volatility and wage flexibility puzzle that hinge on alterations to the wage setting mechanism only work for parameter values outside the range typically estimated.
- Labor Supply and Innovation in Entertainment: Evidence from TV (joint with George Fenton)
We test the effect of innovation in entertainment on labor supply. To identify the effect, we track TV signal during the introduction in the US and exploit variation from a regulated roll-out and terrain interference. Social security records show that the introduction of TV significantly reduced labor supply. The effects are largest for older workers. This confirms descriptive evidence that better leisure activities contributed to changes in retirement habits over the twentieth century. GDP relevant spending on free-to-use services like TV is notoriously low and likely understates the value added of such technology. We apply our estimates to quantify forgone earnings due to TV and find that the value of such time-investment is at least as large as the monetary expenditure on TV.
- Can Helping the Sick Hurt the Able? Incentives, Information and Disruption in a Welfare Reform (joint with Nitika Bagaria, Barbara Petrongolo, John van Reenen)
The UK Jobcentre Plus reform sharpened bureaucratic incentives to help disability benefit recipients (relative to unemployment insurance recipients) into jobs. In the long-run, the policy raised disability exits by 10% and left unemployment outflows roughly unchanged, consistent with beneficial reorganisation effects for both groups, while bureaucrats shifted job-brokering efforts from the unemployed to disability benefit recipients. We account for about 30% of the decline in the disability rolls from 2003-2008. In the short-run, we detect a reduction in unemployment exits and no effect on disability exits, suggesting important disruption effects, and highlighting the difficulty of welfare reform for myopic policymakers.