Labor Substitutability among Schooling Groups

joint with Mark J. Bils and Kai-Jie Wu , FRB Cleveland Working Paper, slides, R&R at AEJ Macro

The degree of substitutability between schooling groups is essential to understanding the role of human capital in income differences and for assessing the economic impact of such policies as schooling subsidies, redistributive taxes, or selective immigration policies. In this paper, we derive a lower bound for the long-run elasticity of labor substitution across schooling groups based on worldwide trends in education, wage premium for schooling, and real GDP. For plausible patterns in technological change, we place the lower bound around 4, which is significantly above values commonly used in the literature. We exploit our bound to reexamine the importance of human capital in cross-country income differences, including the roles of school quality versus the skill bias of technology in the greater efficiency gains from schooling in richer countries.

Corporate Tax Cuts and the Decline of the Labor Share

joint with Immo Schott, FRB Cleveland Working Paper, slides NBER SI 2019, conditionally accepted at Econometrica

In this paper, we argue that the fall in corporate taxation around the world was partially responsible for the fall in the labor share of income. Our contribution is twofold. First, we document a strong empirical connection between corporate tax rates and the manufacturing labor share. We do this using data on a sample of OECD countries as well as data from US states. Second, we propose a macroeconomic model with firm heterogeneity and examine the implications of corporate taxation on the industry’s labor share as well as the distributions of employment and value added. We find that the predictions of the model align with the experience in the manufacturing sector in the US since the 1950s.

Accounting for Wealth Concentration in the US​

joint with David Leung and Markus Poschke, FRB Cleveland Working Paper, slides NBER SI 2019, R&R at AEJ Macro

We assess the empirical relevance of different macroeconomic modeling approaches to wealth concentration, using the joint distribution of earnings, capital income and net worth in combination with an OLG model of household heterogeneity. We find large earnings disparities to be the primary source of US wealth concentration. This reflects the fact that labor income, from salaries but also from entrepreneurship, is a major income source for top income and wealth groups in the data. Bequests and differences in rates of return on capital together explain about half the holdings of the wealthiest of households, but much less for the rest.

The macroeconomic and distributional effects of progressive wealth taxes

joint with Markus Poschke, preliminary draft, slides AEA 2017

The recent rise in wealth inequality has triggered a debate on whether policy measures could and should be taken against it. One widely discussed policy, proposed by Thomas Piketty in his book “Capital in the 20th Century” is a progressive tax on wealth. In this paper, we evaluate the macroeconomic and distributional implications of Piketty’s proposal, and find that the proposal does not meet its intended welfare targets despite a significant reduction in wealth concentration. Most income and wealth poor agents lose slightly. The main beneficiaries of the proposal are middle wealth and income groups. Top wealth groups are worse off. Average welfare is considerably lower in the short-run. Finally, we find that a similar reduction in wealth concentration can be achieved by raising the progressivity of the income tax system. This reform has better welfare properties, as the distortions to aggregate output and the capital stock are more limited.

Quantifying the Signaling Role of Education​


This paper quantifies the signaling role of education by developing and estimating a model that introduces employer learning in an otherwise typical signaling model with socially productive education. In this hybrid model of signaling and human capital, employer learning is associated with a lower return to signaling. I show that, all else equal, markets with less signaling have lower educational attainment conditional on ability, and attract high-ability workers on average. Using panel data from the NLSY, I group workers by occupation, estimate the employer learning process for each group, and use the distribution of education and ability by occupation to estimate the relative significance of signaling and human capital models. The findings suggest that the role of job market signaling relative to the human capital model is 23%. On the margin, a year of schooling raises productivity by 6.4% and the return to signaling is 2.4%. The estimated efficiency cost associated with asymmetric information is 7.6% of life-time earnings.