Best Paper Award, Royal Economics Society Junior Symposium
Top incomes have grown sharply across Western economies in recent decades and we have limited understanding why. This paper provides a quasi-experimental test of the Superstar explanation for top income growth, where rising top incomes are the result of technical change that enables workers to reach bigger markets. I test this explanation using a natural experiment in the labor market for entertainers, where the launch of TV led to a sizeable increase in market reach. Exposure to the change varies across local labor markets as a result of regulatory and technical constraints and I analyze this variation in a differences in differences approach. The data show strong support for the Superstar Effect. During the expansion of market reach entertainer pay at the 99th percentile rises 17 percent, the distribution becomes more skewed while mid income jobs disappear, employment falls and the labor market moves towards a winner takes all market. I estimate the model’s key elasticity to quantify the magnitude of Superstar Effects and find that when market size doubles, top pay grows about 16%.
- 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.
Work in Progress
- Importing Inequality: Globalisation and Top Income Growth (joint with Arun Advani, Lorenzo Pessina, Andrew Summers)
Top incomes have risen dramatically in Anglo-Saxon countries in recent decades, while such growth was modest in most continental European countries. This paper studies the extent to which growth in UK top income shares is explained by the sorting of top earners across countries. Income tax returns on the full population of UK top earners are used to account for selection effects at the top of the income distribution. Accounting for migration of top earners sheds light on the cause of top income growth, can explain differences in top income growth across countries, brings models of top income inequality closer in line with the data, and alters the optimal design of tax schedules.