Essays in labor inequality and risk

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In the last 40 years, the world economy went through two striking transformations that shaped the labor markets around the world. First, technological advancement such as computers, the internet, and cheap automatized machines have changed the way production processes combine capital and labor. Second, the increase in the volume and speed that tradable goods are changing national boundaries have altered the global value chain of various industries. Both phenomena have disrupted the labor market of many countries by displacing workers of specific industries and occupations, and by increasing the labor income inequality between workers with different skills. This dissertation aims to understand how the labor market dynamically responded and what are the welfare consequences of these two transformations. In the first chapter, “Wage Inequality and Occupation Polarization: A Dynamic Perspective”, I argue that job polarization has long lasting effects in the U.S. wage structure. I suggest that, by changing the cross-cohort occupational structure, polarization can impact returns to experience and future wages. Firstly, I document that polarization has different impact across workers of different ages and education. Young workers disproportionally moved to low and high wage occupations in comparison to old workers, with significant differences between educational groups. Secondly, I document substantial heterogeneity in the level and growth of the returns to experience by occupation. Using an overlapping generations model with endogenous education and occupational choice, I show that if there exist complementarities between young and old labor, job polarization can affect the returns to experience. Quantitatively, I use the model to estimate the effect of technological and demographic changes in the U.S. wage structure, accounting for the transition path dynamics. During the transition, because of cohort imbalances and occupation switching costs, inequality is higher: college premium can be almost 10% higher than in the steady state and the relative wage of the median with respect to the top occupation is 12% worse. The model This culminates in a clear policy recommendation: the decrease of occupation switching costs, accelerating the transition and increasing wages of vulnerable groups. In the second chapter, “Trade-Induced Local Labor Market Shocks and Asymmetrical Income Risk ”, co-authored with Ursula Mattioli Mello, we investigate empirically the relationship between international trade and inequality in Brazil. In particular, we inspect how supply and demand shocks affect labor income risk in different regions between 2000 and 2012. Using a longitudinal administrative data set, we find considerable regional heterogeneity in the second and higher moments of the individual income growth distribution. Then, exploiting initial regional sectorial composition, we evaluate the impact of the increase in the Brazil-China trade flows on the dispersion, asymmetry and tails of these distributions. Results indicate that Chinese imports increase the dispersion of income risk. This effect is asymmetrical, since part of the effect comes from the growth of permanent negative shocks relatively to positive ones. The welfare losses of such an increase in risk can be substantial. Through the lens of an incomplete market model, an unborn individual would be willing to forgo up to 12.43% of his consumption to not be part of this riskier labor market.
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