Iourii Manovskii: Research

Published Papers:

Joint with Marcus Hagedorn, University of Oslo and Tzuo Law, Boston College

Econometrica, Forthcoming

 

We assess the empirical content of equilibrium models of labor market sorting based on unobserved (to economists) characteristics. In particular, we show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker (1973) with search frictions can be non-parametrically identified using only matched employer-employee data on wages and labor market transitions. In particular, these data are sufficient to non-parametrically estimate the output of any individual worker with any given firm. Our identification proof is constructive and we provide computational algorithms that implement our identification strategy given the limitations of the available data sets. Finally, we add on-the-job search to the model, extend the identification strategy, and apply it to a large German matched employer-employee data set to describe detailed patterns of sorting and properties of the production function.

Joint with Marcus Hagedorn, University of Oslo and Sergiy Stetsenko, GM Financial

Review of Economic Dynamics, 19(1) Jan. 2016, pp. 161-189.

 

We introduce ex-ante heterogeneity between workers and two technology shocks, neutral and investment-specific, as the driving forces into the basic Mortensen-Pissarides search and matching model. The calibrated model is simultaneously consistent with a strong response of labor market variables to cyclical fluctuations in productivity and a weaker response to changes in taxes found in cross-country data. The model also matches the evidence that countries with higher tax rates have higher aggregate productivity, lower skill premia, and higher unemployment rates among both high- and low-skilled workers. The key mechanism that allows us to achieve these results is that aggregate and group-specific productivities are endogenous and respond to changes in tax policy.

Joint with Fane Groes, Copenhagen Business School and Philipp Kircher, University of Edinburgh

Review of Economic Studies, 82(2) April 2015, pp. 659-692.

 

Using administrative panel data on the entire Danish population we document a new set of facts characterizing occupational mobility. For most occupations, mobility is U-shaped and directional: not only low but also high wage earners within an occupation have a particularly large probability of leaving their occupation, and the low (high) earners tend to switch to new occupations with lower (higher) average wages. Exceptions to this pattern of two-sided selection are occupations with steeply rising (declining) productivity, where mainly the lower (higher) paid workers within this occupation tend to leave. The facts conflict with several existing theories that are used to account for endogeneity in occupational choice, but it is shown analytically that the patterns are explained consistently within a theory of vertical sorting under absolute advantage that includes learning about workers' abilities.

Joint with Hyeok Jeong, Seoul National University and Yong Kim, Yonsei University

American Economic Review, 105(2) Feb. 2015, pp. 784-815.

 

We identify a key role of factor supply, driven by demographic changes, in shaping several empirical regularities that are a focus of active research in macro and labor economics. In particular, demographic changes alone can account for the large movements of the return to experience over the last four decades, for the differential dynamics of the age premium across education groups emphasized by Katz and Murphy (1992), for the differential dynamics of the college premium across age groups emphasized by Card and Lemieux (2001), and for the changes in cross-sectional and cohort-based life-cycle profiles emphasized by Kambourov and Manovskii (2005).

Joint with Marcus Hagedorn, University of Oslo

American Economic Review, 103(2) April 2013, pp. 771-803.

 

We consider a model with on-the-job search where current wages depend only on current aggregate labor market conditions and idiosyncratic match-specific productivities. We show theoretically that the model replicates the findings in Bils (1985) and Beaudry and DiNardo (1991) on the history dependence in wages. We develop a method to measure match qualities in the data and show empirically that various variables summarizing past aggregate labor market conditions have explanatory power for current wages only because they are correlated with match qualities. They lose any predictive power once match qualities are accounted for.

Joint with Gueorgui Kambourov, University of Toronto

Macroeconomic Dynamics, 17(1) January 2013, pp. 172-194.

 

The monthly Current Population Survey (CPS), with its Annual Demographic March supplement, and the Panel Study of Income Dynamics (PSID) are the leading sources of data on worker reallocation across occupations, industries, and firms. Much of the active current research is based on these data. In this paper, we contrast these datasets as sources of data for measuring the dynamics of worker mobility. We find that (i) (March) CPS data is characterized by a substantial amount of noise when it comes to identifying occupational and industry switches; (ii) March CPS data provides a poor measure of annual occupational mobility and, instead, most likely measures mobility over a much shorter period; (iii) (the changes in) the procedure to impute missing data has a dramatic effect on the interpretation of the CPS data in, e.g., the trend in occupational mobility. The most important shortcomings of the PSID are the facts that (i) occupational and industry affiliation data is available in most years at an annual frequency; (ii) the PSID's sample, by design, excludes immigrants arriving to the U.S. after 1968; (iii) the Retrospective Occupation-Industry Files with reliable occupation and industry affiliation data are available only until 1980.

Joint with Marcus Hagedorn, University of Oslo

International Economic Review, 52 (3) Aug. 2011, pp. 603-619.

 

The productivity-driven Mortensen-Pissarides model predicts that labor productivity, defined as the ratio of output to employment, is strongly correlated with employment, unemployment, vacancies and wages whereas these correlations were argued to be much weaker in the data, especially since the mid 1980s. We first document that the size of these discrepancies between the data and the model becomes substantially smaller if employment data from the Current Population Survey is used in measuring productivity instead of the commonly used employment data from the Current Employment Statistics. Second, we show that incorporating time to build and a stochastic value of home production helps reconcile the quantitative performance of the model with the data with stochastic productivity being the key determinant of the business cycle dynamics of the model.

Joint with Gueorgui Kambourov, University of Toronto

Review of Economic Studies, 76 (2) April 2009, pp. 731-759.

[Extended (but somewhat different) working paper version available here

 

In this paper we argue that wage inequality and occupational mobility are intimately related. We are motivated by our empirical findings that human capital is occupation-specific and that the fraction of workers switching occupations in the United States was as high as 16% a year in the early 1970s and had increased to 21% by the mid 1990s. We develop a general equilibrium model with occupation-specific human capital and heterogeneous experience levels within occupations. We find that the model, calibrated to match the level of occupational mobility in the 1970s, accounts quite well for the level of (within-group) wage inequality in that period. Next, we find that the model, calibrated to match the increase in occupational mobility, accounts for over 90% of the increase in wage inequality between the 1970s and the 1990s. The theory is also quantitatively consistent with the level and increase in the short-term variability of earnings.

Joint with Gueorgui Kambourov, University of Toronto

International Economic Review, 50 (1) February 2009, pp. 63-115.

 

We find that returns to occupational tenure are substantial. Everything else being constant, 5 years of occupational tenure are associated with an increase in wages of 12% to 20%. Moreover, when occupational experience is taken into account, tenure with an industry or employer has relatively little importance in accounting for the wage one receives. This finding is consistent with human capital being occupation specific.

Joint with Marcus Hagedorn, University of Oslo

American Economic Review, 98(4), September 2008, pp. 1692-1706.

[Extended working paper version available here

 

Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We propose a new calibration strategy of the standard model that uses data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters - the value of non-market activity and the bargaining weights. Our calibration implies that the model is consistent with the data.

Joint with Gueorgui Kambourov, University of Toronto

International Economic Review, 49 (1) February 2008, pp. 41-79.

 

We document and analyze the high level and the substantial increase in worker mobility in the United States over the 1968-1997 period at various levels of occupational and industry aggregation. This is important in light of the recent findings in the literature that human capital of workers is largely occupation- or industry-specific. To control for measurement error in occupation and industry coding, we develop a method that utilizes the Retrospective Occupation-Industry Supplemental Data Files, newly released by the Panel Study of Income Dynamics. This allows us to obtain the most reliable estimates of occupational and industry mobility levels available in the literature. We emphasize the importance of these findings for understanding a number of issues such as the changes in wage inequality, aggregate productivity, job stability, and life-cycle earnings profiles.

Joint with Gueorgui Kambourov, U. of Toronto and Irina Telyukova, U. of California San Diego

In Frontiers in Family Economics, Volume 1, edited by Peter Rupert, pp. 217-256, 2008. Emerald Group Publishing Limited, UK.

 

We study trends in occupational and geographic mobility of single and married men and women in the United States over the last 40 years. We find that while occupational mobility has increased for almost all subgroups of males, most of the increase was accounted for by a sharp increase in the mobility of singles. Similarly, the rates of geographic mobility were virtually identical for single and married workers in the early 1970s, but diverged since then: the increase in the geographic mobility of single men was more pronounced than the increase for married men. We discuss several theories of worker mobility in light of these trends and suggest that the increased labor force attachment of women might have played a prominent role in driving these changes.

 

Research Papers:

April 2016

Joint with Dmytro Hryshko, University of Alberta and Moira Daly, Copenhagen Business School

 

The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. It determines both the equilibrium distributions of endogenous outcomes and the design of optimal policies. Yet, there is no consensus in the literature on the relative magnitudes of the permanent and transitory innovations in earnings. When estimation is based on the earnings moments in levels, the variance of transitory shocks is found to be relatively high. When the moments in differences are used, the variance of the permanent component is relatively high instead. We show theoretically that the difference can be induced by the fact that earnings at the start or at the end of earnings spells are lower and more volatile than the observations in the interior of earnings histories. Using large administrative datasets from Denmark and Germany, we show that this property of earnings spells quantitatively accounts for the full amount of discrepancy in the estimates. Finally, we show that this property of earnings can induce a substantial upward bias in the estimate of consumption insurance against permanent shocks in the standard incomplete markets model.

January 2016

Joint with Marcus Hagedorn, University of Oslo and Kurt Mitman, IIES Stockholm University

NBER Working Paper 20884.

 

We measure the aggregate effect of unemployment benefit duration on employment and the labor force. We exploit the variation induced by the Congresss failure in December 2013 to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Our baseline estimates reveal that a 1 percent drop in benefit duration leads to a statistically significant increase of employment by 0.019 log points. In levels, 2.1 million individuals secured employment in 2014 due to the benefit cut. More than 1.1 million of these workers would not have participated in the labor market had benefit extensions been reauthorized.

April 2016

Joint with Marcus Hagedorn, University of Oslo, Fatih Karahan, NY Fed, and Kurt Mitman, IIES Stockholm University

NBER Working Paper 19499.

 

Equilibrium labor market theory suggests that unemployment benefit extensions affect unemployment by impacting both job search decisions by the unemployed and job creation decisions by employers. The existing empirical literature focused on the former effect only. We develop a new methodology necessary to incorporate the measurement of the latter effect. Implementing this methodology in the data, we find that benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, employment, and a rise in unemployment.

May 2016

Joint with Marcus Hagedorn, University of Oslo and Kurt Mitman, IIES Stockholm University

NBER Working Paper 22280.

 

We critically review recent methodological and empirical contributions aiming to provide a comprehensive assessment of the effects of unemployment benefit extensions on the labor market and attempt to reconcile their apparently disparate findings. We describe two key challenges facing these studies - the endogeneity of benefit durations to labor market conditions and isolating true effects of actual policies from agents' responses to expectations of future policy changes.

 

Marinescu (2015) employs a methodology that does not attempt to address these challenges. A more innovative approach in Coglianese (2015) and Chodorow-Reich and Karabarbounis (2016) attempts to overcome these challenges by exploiting a sampling error in unemployment rates as an exogenous variation. Unfortunately, we find that this approach falls prey to the very problems it aims to overcome and it appears unlikely that the fundamental bias at the core of this approach can be overcome. We find more promising the approach based on unexpected policy changes as in the recent contributions by Johnston and Mas (2015) and Hagedorn, Manovskii and Mitman (2015). This approach by design addresses the problem of benefit endogeneity. It does not, however, fully address the effects of expectations and generally yields a lower bound on the actual effects of policies.

 

A More Focused Discussion of Writings by Chodorow-Reich and Karabarbounis:

- NBER EFG Discussion

- CRK Writings: CRK (2016a) - original piece, CRK (2016b) - reply to HMM's review, CRK (2016c) - reply to EFG discussion

- A rebuttal to CRK writings:

Some Observations on ``The Limited Macroeconomic Effects of Unemployment Benefit Extensions" and Related Writings by Chodorow-Reich and Karabarbounis

August 2016

Joint with Marcus Hagedorn, University of Oslo and Kurt Mitman, IIES Stockholm University

 

In Hagedorn et al. (2016a) we reviewed Chodorow-Reich and Karabarbounis (2016a) among other recent contributions to the literature studying the aggregate implications of unemployment benefit extensions. We were also invited to discuss their paper at the summer 2016 NBER EF&G meeting with the slides of our discussion available as Hagedorn et al. (2016b). We found the identification argument in CRK (2016a) to be incorrect because the exogeneity of the estimator they proposed and implemented does not follow from their fundamental identifying assumption of exogeneity of the measurement error in unemployment.

 

The authors responded to our assessment in Chodorow-Reich and Karabarbounis (2016b,c) and proposed a new identification argument to justify their measurement strategy. In this paper we explain that their new identification argument does not overcome the endogeneity problems we previously documented. To avoid being repetitive, we focus only on the issues relevant for understanding CRK's two identification strategies and their replies. We refer the interested reader to HMM (2016a,b) for additional thoughts on CRK's analysis.

 

Replication package of all the data, programs, and log files reported in this paper.

 

April 2014

Joint with Luigi Bocola, University of Pennsylvania and Marcus Hagedorn, University of Oslo

 

The role of neutral technology shocks in driving business cycle fluctuations is hotly debated. Yet, we argue that there is no existing empirical methodology that allows to identify neutral shocks in the data in the presence of input heterogeneity in the aggregate production function. We develop a method that identifies a neutral technology shock based on the result that it is the only shock consistent with balanced growth properties. Monte Carlo simulations using benchmark business cycle models imply that the proposed method performs very well in small samples. We apply the method to assess the role of neutral technology in driving business cycle fluctuations in U.S. data.

March 2016

Joint with Dmytro Hryshko, University of Alberta

 

Most of what the profession knows about joint income and consumption dynamics at the household level in the U.S. is based on the data from the Panel Study of Income Dynamics (PSID). For example, Blundell, Pistaferri, and Preston (2008) use these data to document a high degree of consumption insurance against permanent income shocks relative to the prediction of the standard incomplete markets model. We use the same data and find consistent evidence of drastically different insurance patterns in two distinct PSID subsamples. The PSID comprises the original sample members interviewed in 1968 and their offsprings, who we refer to as ``sample'' individuals. It also includes ``non-sample'' members, who marry sample males or females. Cross-sectionally, the households headed by sample and non-sample males appear very similar across many dimensions. Yet, we find a nearly complete pass-through of permanent income shocks to consumption for households headed by sample males. In contrast, families headed by non-sample males show a dramatically higher degree of insurance against permanent income shocks. We explore the reasons for this discrepancy and find evidence that the dynamics of income is very different among the two groups of households. In particular, income shocks of households headed by non-sample males are much less persistent. We see no a priori compelling reason for these large differences. However, assuming that these differences in income processes are genuine and are not induced by PSID sampling and data collection procedures, they can align the estimate of insurance among households headed by sample and non-sample males with the prediction from the standard incomplete markets model.

September 2010

Joint with Bjoern Bruegemann, Yale University

 

The US health insurance system for those younger than 65 is and will remain largely employer-based after the implementation of the 2010 reform. We develop an equilibrium model of the existing system and study quantitatively the likely effects of the enacted legislation. We show that to match the key empirical regularities of the existing system it is essential to model workers as being discrete, match the firm size distribution and the extent of search frictions, and to model explicitly government regulations affecting the system, such as tax-advantaged treatment of employer purchased coverage and legal non-discrimination restrictions. The model predicts that the enacted reform will achieve universal coverage. The premium regulations of the reform alone would induce a collapse of coverage due to adverse selection. But the accompanying tax credits for small businesses and penalties for individuals are sufficient to prevent this collapse.

August 2010

Joint with Gueorgui Kambourov, University of Toronto and Miana Plesca, University of Guelph

 

A large literature studying the returns to firm- and government-sponsored training has made a striking observation. Immediately following a training episode, wages of participants in firm-sponsored training rise substantially while wages of participants in government-sponsored training rise little, or even decline. This has sparked considerable research interest in studying why government-sponsored training is so ineffective. In this paper we show that there is a clear selection issue overlooked by the existing literature. In particular, a large fraction of the participants in government-sponsored training are occupation switchers, while most participants in firm-sponsored training are occupation stayers. Since a switch of an occupation involves a substantial destruction of human capital, the associated decline in wages needs to be accounted for. Once we do this, we find a large positive impact of training on workers' human capital. The magnitude of this effect is similar for firm- and the government-sponsored training. Depending on how strong the effect of training on occupational mobility is, our analysis provides bounds on the returns to training with the standard estimators of the returns to government-sponsored training corresponding to the lower bound.

October 2010

Joint with Marcus Hagedorn, University of Oslo

 

We propose a way to measure the contribution of search frictions to the level of wage dispersion observed in the data. Using the data from the 1979 cohort of the National Longitudinal Survey of Youth we find that the variance of match qualities between workers and employers accounts for about 6% of the variance of log wages. Our method relies on a minimal set of assumptions, the main among them being that match quality is constant over the duration of a job. We show that this assumption can be verified empirically and is supported by the data.

October 2009

Joint with Gueorgui Kambourov, University of Toronto

 

We document a significant flattening of life-cycle earnings profiles for the successive cohorts of male workers entering the labor market since the late 1960s. Further, we provide evidence on the steepening in the profiles of earnings inequality and an upward shift in the profiles of occupational mobility for more recent cohorts. We develop a theory that relates these developments and study quantitatively what fraction of the change in the life-cycle profiles of earnings and earnings inequality is accounted for by the economic forces that drive the increase in occupational mobility. The results indicate that the increase in the variability of productivity shocks to occupations from the early 1970s to the late 1990s, may account for all these observations. The theory we propose is consistent with other facts characterizing the changes in the labor market, such as a sharp increase in cross-sectional wage inequality and the increase in the transitory variability of earnings.


Data Project: Postwar U.S. Labor Productivity Data

Joint with Bjoern Bruegemann, Yale University and Marcus Hagedorn, University of Zurich

Latest Update: October 3, 2010 (Extended unpublished BLS LPC aggregate productivity series to Q2 2010)

 

Research on U.S. labor productivity is complicated by the fact that a variety of measures is in use, which differ along several dimensions. The objective of this project is to construct and make available a dataset that contains most relevant series to provide a common ground for the discussion.

 

Data

Data Description

 

 

Work in Progress:

Excessive Risk Taking (with Marcus Hagedorn)

Demand Stimulus and Inflation: Empirical Evidence (with Marcus Hagedorn and Jessie Handbury)

Unemployment Benefits and Unemployment in the Great Recession: The Role of Micro Effects (with Marcus Hagedorn and Kurt Mitman)

Employer Coverage Decisions: Unintended Consequences of 2010 Health Insurance Reform (with Bjoern Bruegemann and Gregory Phelan)

Plugging Holes (with Philipp Kircher)

Interpreting Income Dynamics (with Moira Daly, Fane Groes, and Dmytro Hryshko)

The Fiscal Multiplier (with Marcus Hagedorn and Kurt Mitman)

The Cyclical Behavior of Worker Reallocation (with Marcus Hagedorn and Gueorgui Kambourov)

 

Temporarily Abandoned Projects:

November 2002

 

I show that, in the absence of complete insurance markets, progressive taxation of labor income may provide productivity and welfare gains as compared to a revenue-equivalent proportional tax. In order to increase income in the future, individuals have to forgo income today by accepting lower wages while accumulating human capital or when destroying specific human capital in order to build it elsewhere. I first show analytically that a progressive tax system encourages people to make these temporary sacrifices despite the increased tax burden when wages are high. Next, I measure the quantitative importance of this channel in a calibrated general equilibrium model.

 

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