Essays on empirical macroeconomics

Abstract

This thesis consists of three chapters in empirical macroeconomics. In the first chapter, I study downward wage rigidity. Downward wage rigidity is central to many explanations of unemployment fluctuations. In benchmark models, the wage for new hires is particularly important, but there is limited evidence of downward rigidity on this margin. We introduce a dataset that tracks the wage for new hires at the job level -- across successive vacancies posted by the same job title and establishment. We show that the wage for new hires is rigid downward but flexible upward, in two steps. First, the nominal wage rarely changes at the job level. When wages do change, they fall infrequently, suggesting a constraint from below. Second, when unemployment rises, wages do not fall --

but wages do rise strongly as unemployment falls. We show that prior strategies, which study the average wage for new hires, cannot detect downward rigidity due to changing job composition. We then develop a tractable dynamic wage bargaining model with downward rigidity. We fit the model to our findings, and uncover state dependent asymmetry in unemployment dynamics. When there has been a contraction in the recent past, unemployment responds symmetrically to subsequent labor demand shocks; when there has recently been an expansion, unemployment is subsequently twice as sensitive to negative as to positive shocks. In the second chapter, I study the fall in the labor share. The labor share fell in the US and worldwide after the 1980s. This paper argues the falling labor share dampens unemployment fluctuations, in two steps. First, the paper studies a class of labor search models with capital.

The falling labor share lowers the sensitivity of unemployment to labor demand shocks, regardless of whether rising capital or rising rents govern the labor share. The peak-to-trough fall in the US labor share lowers the sensitivity of unemployment to labor demand shocks by 30%. Second, the paper provides evidence for dampening. I exploit labor share variation within industries and between regions, to show that low labor share markets are less sensitive to the aggregate business cycle. Then I identify variation in the labor share using the passage of statewide reforms. After these reforms pass, the labor share falls, and state unemployment becomes less sensitive to aggregate business cycles. In the third chapter, I study systemic risk in the banking system. Banks face different but potentially correlated risks from outside the financial system. Financial connections can help hedge these risks, but also create the means by which shocks can propagate.

We examine this tradeoff in the context of a new stylised fact we present: German banks are more likely to have financial connections when they face more similar risks -- potentially undermining the hedging role of financial connections and contributing to systemic risk. We find that such patterns are socially suboptimal, but can be explained by risk-shifting. Risk-shifting motivates banks to correlate their failures with their counterparties even though it creates systemic risk. JEL Codes E24, G21