Events

Dr. Mons Chan
Assistant Professor of Economics
Queen’s University

We develop a dynamic model of firms and wage setting in imperfect labor markets
and show that markdowns, and thus the link between firm productivity and
wages (passthrough), depend on firm-specific labor supply elasticities, production
technology, and adjustment costs. Our framework allows us to recover the full distribution
of firm-level productivity, wage markdowns, passthrough and labor supply
elasticities, controlling for unobserved worker heterogeneity. Using administrative
data from Denmark, we find that on average, firms respond to a 1% increase in
productivity by lowering (widening) markdowns by 1.7% and increasing marginal
productivity by 2.1%, leading to a 0.4% increase in wages. Passthrough of industry
and aggregate shocks are 0.07 and 1.18 respectively, reflecting relatively inelastic
aggregate labor/intermediate supply curves. Firms hoard labor in response to adjustment
costs and uncertainty about future productivity, driving wages above the
level suggested by our estimated labor supply elasticities and reducing passthrough
to wages, especially for larger firms. Labor market power also reduces passthrough,
with large firms having one fifth of the passthrough of smaller firms. Both market
imperfections combined decrease the labor income volatility arising from firm risk
by 77%.