Outline

This module considers some inter-related topics that seek to explain wage dispersion in a labour market, as documented recently in Card et al. (2013, QJE) for Germany. We will focus on dynamic labour supply, frictional job search (why do similar workers earn different wages?), as well as sorting of workers across firms (do more productive workers tend to work in more productive firms?) or across locations (do more productive workers work in larger cities, or is the city wage premium the result of externalities, so called “agglomeration economies” ?)

We will not only explore various theories, but an equal emphasis will be placed on practical implementations (the algorithms and their explicit implementations in languages such as , or Julia if speed is of the essence; however, only basic knowledge is required.)

Practical Examples

These could include (depending on students’ needs and interests):

• Static and dynamic labour supply (dynamic programming using backward induction and value function iterations).

• Empirical models with worker and firm fixed effects (two-way FE modelling, the AKM approach); an exploration of the limited mobility bias (as explored in Andrews et al., 2008, JRSS).

• Job search models, starting with McCall (1970, QJE) and its generalisations, as well as Shimer (2005, AER).

• Worker sorting in theory and practice, problems with AKM, and Smith and Shimer (2000, ECTA).

Some references

• Card, D., J. Heining, and P. Kline (2013). “Workplace Heterogeneity and the Rise of West German Wage Inequality.” The Quarterly Journal of Economics, 128, 3, 967-1015.

• Andrews, M.J, Gill, L., Schank, T., and R. Upward (2008). “High wage workers and low wage firms: negative assortative matching or limited mobility bias?” Journal of the Royal Statistical Society A, 673-697.

• McCall, J.J. (1970). “Economics of Information and Job Search.” The Quarterly Journal of Economics, 84, 113-126.

• Shimer, R. (2005). “The Cyclical Behavior of Equilibrium Unemployment and Vacancies.” American Economic Review, 95, 25-49.

• Smith, L. and R. Shimer (2000). “Assortative Matching and Search.” Econometrica, 68, 343-369.

Slides and Coding Exercises

1. Sorting in the Labour Market I: AKM (Two-way FEs Modelling)
   • [AKM: Identification exercises]
   • [( R ) AKM: coding exercises]
   • [Solutions]
   • [parallel implementations]
2. Sorting in the Labour Market II: Inequality in Germany (CHK and AKM)
3. Sorting in the Labour Market III: Introduction to Search Theory (McCall, and Diamond’s paradox)
   • [McCall (in Julia)] Illustrating VFI in the McCall model.
   • [Chetty (2008, R)] Illustrating BI in a modified McCall model with search effort.
4. Sorting in the Labour Market IV: Identification of PAM in Structural Search and Matching Models
   • [Shimer and Smith (2000, R)] Search and assortative matching: AKM using Shimer and Smith (2000).

Additional resources

• Dynamic Programming (DP)
  • [: DP introductory slides] Backward induction (BI) and value function iterations (VFI).
  • [DP Coding Examples]