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.
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.
“Rent Sharing Within Firms” (with Alan B. Krueger)
This paper analyzes the extent to which rents are shared among different groups of workers within the same firms. In particular, we exploit the fact that crude oil prices are largely determined in global markets in order to examine how shocks to firm profitability affect workers throughout the earnings distribution at companies across the petroleum industry. Consistent with previous studies, we find that both profits as well as employee compensation are responsive to the price of petroleum among oil exploration and production firms. However, our analysis also demonstrates that the elasticity of worker pay with respect to oil prices is heterogeneous across employees, and smaller in magnitude at the bottom of the earnings distribution. Notably, we fail to identify similar effects among companies that utilize oil as a factor of production such as petroleum refineries and air transportation firms. These results are consistent with a model of rent sharing in which lower paid workers possess less bargaining power.