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Essays on Wage Inequality and Employment Informality by Daniel Essays on Wage Inequality and Employment Informality by Daniel Haanwinckel Junqueira A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Economics in the Graduate Division of the University of California, Berkeley Committee in charge: Professor Patrick Kline, Co-chair Professor Frederico Finan, Co-chair Professor Andrés Rodríguez-Clare Professor David Card Professor Thibault Fally Spring 2019 Essays on Wage Inequality and Employment Informality Copyright 2019 by Daniel Haanwinckel Junqueira 1 Abstract Essays on Wage Inequality and Employment Informality by Daniel Haanwinckel Junqueira Doctor of Philosophy in Economics University of California, Berkeley Professor Patrick Kline, Co-chair Professor Frederico Finan, Co-chair This dissertation develops models to understand changes in the wage distribution and employment informality rates. Common themes are imperfect competition in the labor market, firm and worker heterogeneity, imperfect substitution between different levels of skill in production, and minimum wages. In each chapter, I present a model, discuss its properties, estimate it using Brazilian data, and use it for counterfactual analysis. In the first chapter, I build a tractable framework for analyzing the equilibrium effects of labor supply shocks, technical change, and minimum wages in an imperfectly competitive labor market environment with worker and firm heterogeneity. Goods are produced using task-based technologies exhibiting imperfect substitution between worker types. Firms spe- cialize in the production of particular goods, which leads to differences in task requirements, entry costs, and workplace amenities. These differences generate firm heterogeneity in skill intensity, size, and wages. The model has three advantages relative to the canonical supply- demand-institutions framework typically used to study trends in wage inequality. First, task-based production with multiple worker types allows for plausibly rich formulations of the structure of technical change. Second, the model accounts for equilibrium effects of min- imum wages, compressing the wage distribution and generating spillovers on quantiles where the minimum wage does not bind. Third, the model makes predictions regarding labor mar- ket sorting and cross-firm wage dispersion. I take a simple version of the model to Brazilian matched employer-employee data and show that it can fit several aspects of wage inequality: differences in mean log wages between educational groups, within education group variances, and two-way variance decompositions of log wages into worker and firm components. The model also matches reduced-form estimates of minimum wage spillovers. I use the esti- mated parameters to decompose observed changes in inequality and sorting into components attributable to increasing schooling achievement, technical change, and a rising minimum wage. Falling wage inequality in Brazil is primarily due to the minimum wage, while rising worker-firm assortativeness is found to be driven by technical change. The decomposition 2 exercise also illustrates how responses to supply and demand shocks differ qualitatively from those predicted by models with a representative firm. The second chapter is coauthored with Rodrigo R. Soares. We develop a search model of informal labor markets with worker and firm heterogeneity, intra-firm bargaining with imperfect substitutability across types of workers, and a comprehensive set of labor regula- tions, including minimum wage. Stylized facts associated with the informal sector, such as smaller firms and lower wages, emerge endogenously as firms and workers decide whether to comply with regulations. Imperfect substitutability across types of workers and decreasing returns to scale enable the model to reproduce empirical patterns incompatible with existing frameworks in the literature: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, and the declining formal wage premium by skill level. These features also allow us to analyze the equilibrium responses to changes in the demand and supply of different types of labor. We estimate the model using Brazilian data and show that it closely reproduces the decline in informality observed between 2003 and 2012. The change in the composition of the labor force appears as the main driving force behind this phenomenon. We illustrate the use of the model for policy analysis by assessing the effectiveness of a progressive payroll tax in reducing informality. i Para Thaís, Isabela e Lucas. ii Contents Contents ii List of Figures iv List of Tables v 1 Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution 1 1.1 Introduction ...................................................................... 1 1.2 The task-based production function ............................................ 4 1.3 Markets and wages .............................................................. 12 1.4 Quantitative exercise: wage inequality and sorting in Rio Grande do Sul, Brazil ............................................................................. 22 1.5 Conclusion........................................................................ 40 2 Workforce Composition, Productivity, and Labor Regulations in a Compensating Differentials Theory of Informality 42 2.1 Introduction ...................................................................... 42 2.2 Empirical Context ............................................................... 47 2.3 The Model........................................................................ 51 2.4 Fitting the Model ................................................................ 61 2.5 Quantitative Results............................................................. 67 2.6 Concluding Remarks............................................................. 77 Bibliography 79 A Appendix to Chapter 1 89 A.1 Proofs ............................................................................ 89 A.2 Numerical implementation ..................................................... 99 A.3 Appendix to the quantitative exercise.......................................... 100 B Appendix to Chapter 2 107 B.1 Costs of Formal Labor and Valuation of Benefits by the Formal Employee . 107 iii B.2 Informality Trends by Economic Activity ...................................... 110 B.3 Solution to the Problem of the Firm ........................................... 113 B.4 Solution to the Wage Bargaining Equation .................................... 114 B.5 Numerical Procedures ........................................................... 121 B.6 Some Preliminary Evidence on Educational Composition and Labor Mar- ket Outcomes .................................................................... 128 iv List of Figures 1.1 Compensated labor demand in competitive labor markets ....................... 8 1.2 Distance-dependent complementarity .............................................. 10 1.3 Choice of rejection criterion and bunching at the minimum wage ............... 17 1.4 Measures of wage dispersion in Rio Grande do Sul, Brazil ....................... 24 1.5 Changes in educational achievement and minimum wages ....................... 25 1.6 Distribution of log wages, data and model......................................... 35 1.7 Minimum wage spillovers ........................................................... 36 1.8 Wages and employment by firm type and worker type ........................... 37 2.1 Evolution of Informality, Unemployment and Real Wages for Salaried Workers, Brazil, 1995-2012 .............................................................................. 50 A.1 Measures of wage dispersion, PNAD data, formal sector ......................... 102 A.2 Measures of wage dispersion, PNAD data, all workers............................ 104 A.3 Changes in educational achievement, PNAD data ................................ 105 B.1 Minimum Wage Status According to Firm Size ................................... 119 B.2 Problem of the Firm and Minimum Wages ........................................ 120 B.3 Hierarchy for the numerical procedures. ........................................... 122 v List of Tables 1.1 Reduced form estimates of minimum wage spillovers ............................. 27 1.2 Variance decomposition from two-way fixed effects model........................ 29 1.3 Target moments and model fit...................................................... 30 1.4 Estimated parameters ............................................................... 31 1.5 Model-based decomposition: supply, demand, and minimum wages. ............ 38 2.1 Labor Market Outcomes, Brazil, 2003-2012 ....................................... 48 2.2 Educational Distribution of Workers by Sector and Firm Size, Brazil, 2003 .... 49 2.3 Formal Wage Distribution by Schooling Levels and Workforce Composition, Brazil, 2003 or 2012 (when indicated) ............................................. 49 2.4 Parameters Imputed from the Data or from the Literature ...................... 64 2.5 Estimated Parameters - Minimum Distance Procedure ........................... 65 2.6 Moments Used in Estimation ...................................................... 66 2.7 Firms in the Model .................................................................. 66 2.8 Quantitative Experiments, Changes in the Brazilian Labor Market between 2003 and 2012.......................................................................
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