How do firms respond to demand shocks? I approach this fundamental question from a novel perspective by leveraging two firm-level datasets that provide a uniquely detailed opportunity to examine how employers react to changes in the demand for their output. Specifically, this paper combines linked employer-employee administrative records for a subset of U.S. firms from ADP, LLC with a comprehensive database of transactions from the American Recovery and Reinvestment Act (ARRA), which appropriated $275 billion in purchases of goods and services during the Great Recession. Utilizing a matched difference-in-differences strategy as well as exploiting heterogeneity in both the timing and the magnitude of these purchases, I compare firms that received ARRA funds to a counterfactual sample of employers that were not directly connected to the Recovery Act. I find that companies which experienced these demand shocks responded by increasing both employment and wages relative to their counterparts. Furthermore, the magnitudes of these changes suggest that the labor supply to an individual firm is relatively inelastic, even in a deep recession, and provide evidence of monopsonistic wage-setting in U.S. labor markets.
“Rent Sharing Within Firms” (with Alan B. Krueger)
This paper investigates the extent to which economic rents are shared among different types of workers within a given firm. We exploit the fact that petroleum prices are largely determined by global factors in order to utilize the price of crude oil as an instrument for the productivity of petroleum extraction firms. Consistent with previous studies, our analysis demonstrates that rents primarily accrue to firms rather than workers. In particular, we estimate that a 1 percent rise in oil prices leads to a 0.05 percent increase in earnings for upstream petroleum employees. Notably, wages appear to be unresponsive to changes in oil prices at industries that tend to regard petroleum as an input to production. Moreover, we find that the elasticity of wages with respect to oil prices is heterogeneous throughout a firm and significantly higher for workers at the top of the earnings distribution. These results can be rationalized by a model in which insiders within a firm possess relatively greater bargaining power over the division of rents as a consequence of their higher replacement costs.
Long-term transition rates calculated from the Current Population Survey, the Survey of Income and Program Participation, and Rutgers University’s Work Trends Survey indicate that the long-term unemployed have a 20 to 40 percent lower probability of being employed 1 to 2 years in the future than do the short-term unemployed. In comparison with the short-term unemployed, for the long-term unemployed the job finding rate is less sensitive to the state of the business cycle, but their labor force withdrawal rate is more procyclical. A calibration exercise finds that the tendency of the labor force withdrawal rate of the long-term unemployed to decline in a recession and then rise in a recovery plays an important role in the well-documented loop around the Beveridge curve. Overall, the results suggest that the longer workers are unemployed, the less attached they become to the labor market.