Wage Inequality and the Spatial Expansion of Firms (Job market paper)

Awarded Best Job Market Paper by the European Economic Association and Unicredit Foundation

Multi-region firms increasingly dominate the U.S. economy. I study the implications of this trend for labor market inequalities. I document that multi-region service firms account for most of the rise in wage inequality since the 1980s, and provide evidence on the uneven nature of their spatial expansion: larger firms operate establishments in more locations, while hiring more skilled labor and paying higher wages in spatially-concentrated headquarters. I integrate this structure into a general equilibrium model, in which (a) firms open branches to serve local markets; (b) the output of headquarters workers is non-rival across branches; (c) firms have wage-setting power. The resulting wage distribution depends on the full network of firm spatial activity, and inequality rises with firms' geographical scope. The model admits tractable aggregation despite its complex micro-structure. I estimate it for 391 U.S. labor market areas and infer frictions to spatial expansion from the universe of HQ-branch linkages. Quantitatively, the decline in these frictions since the 1980s can account for multiple trends in U.S. labor markets, including rising inequality across establishments – between and within firms – and higher inequality and segregation across space.

Dynamic Spatial General Equilibrium, with Ernest Liu and Stephen Redding [Online Appendix] [Online Supplement] [Model Economy Toolkit]

Accepted, Econometrica

We incorporate forward-looking capital accumulation into a dynamic discrete choice model of migration. We characterize the steady-state equilibrium; generalize existing dynamic exact-hat algebra techniques to incorporate investment; and linearize the model to provide an analytical characterization of the economy’s transition path using spectral analysis. We show that capital and labor dynamics interact to shape the economy’s speed of adjustment towards steady-state. We implement our quantitative analysis using data on capital stocks, populations and bilateral trade and migration flows for U.S. states from 1965-2015. We show that this interaction between capital and labor dynamics plays a central role in explaining the observed decline in the rate of income convergence across U.S. states and the persistent and heterogeneous impact of local shocks.

Intermediate Input Prices and the Labor Share, with Juanma Castro-Vincenzi

Reject and resubmit, Econometrica

We explore how the labor share relates to the price of materials in the economy, and highlight a negative relationship between them under conditions of imperfect competition and complementarity between materials and primary inputs. We show that fluctuations in the price of materials align with aggregate trends in the US labor share, including a sharp decline during the 2000s commodity boom and stabilization in recent years. Consistent with these trends, we provide causal evidence for the negative effect of materials prices on the labor share. We decompose changes in the labor share to identify the role of materials prices relative to other explanations and show that its decline in recent decades would have been smaller and smoother under constant material prices. We extend our framework to a multi-country setting and demonstrate, theoretically and empirically, how shocks to global commodity markets yield heterogeneous changes in the labor share across countries.

International Friends and Enemies, with Ernest Liu and Stephen Redding [Online Appendix] [LSE Business Review Article] [VoxEU Article] [VoxDEV Article] [Economist Free Exchange]
Revise and resubmit, American Economic Journal: Macroeconomics

We examine whether as countries become more economically dependent on a trade partner, they realign politically towards that trade partner. We use network measures of economic exposure to foreign productivity growth derived from the class of trade models with a constant trade elasticity. We establish causality using two different sources of quasi-experimental variation: China's emergence into the global economy and the reduction in the cost of air travel over time. In both cases, we find that increased economic friendship causes increased political friendship, and that our theory-based network measures dominate simpler measures of trading relationships between countries.