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Dissertation/Thesis Abstract

Essays on worker displacement and the minimum wage
by Phelan, Brian J., Ph.D., The Johns Hopkins University, 2013, 161; 3572708
Abstract (Summary)

This dissertation is composed of three essays. In the first essay of this dissertation, I reexamine the effect of industrial mobility on the cost of worker displacement. While the human capital implications of this regularity are well understood, no current model can explain why a displaced worker would ever choose to "switch." I develop a match-based model of wages and endogenous mobility and show that switching industries may, indeed, be optimal for some "mismatched" workers. I then use data on displaced workers to re-estimate the cost of switching industries that controls for the endogeneity of industrial mobility. I find that switching industries is an optimal decision from the point of view of individual displaced workers — i.e. that losses would have been even larger had they "stayed." The results suggest that skill mismatch and the resulting inability of some workers to re-match their task-specific skills via reemployment is an important determinant of the observed costs of worker displacement.

In the second essay, I estimate the degree of heterogeneity in the outcomes of displaced workers and analyze the extent to which these heterogeneous experiences can be explained by observable (or "systematic") factors as opposed to unobserved (or "idiosyncratic") factors. To this end, I use data on displaced workers to estimate the standard deviation of earnings losses following displacement. I find statistically significant heterogeneity at the lower bound, which is equal to about half of the mean effect each year following displacement. Once I control for systematic differences in observable characteristics, the remaining idiosyncratic variation is estimated to be about 20%-40% less than the total variation in the first few years following displacement and 50%-80% less than the total variation six to eight years after displacement. Systematic variation, however, remains fairly large and constant over time. These results suggest that idiosyncratic factors, such as luck or unobserved quality, have largely transitory effects on the outcomes of displaced workers while systematic factors, such as industrial mobility and unemployment duration, disproportionately explain the persistent heterogeneity in the costs of worker displacement.

The third essay explores the potential causes of spillovers in the wage distribution that occur when the minimum wage increases. This empirical phenomenon, known as the "ripple effect" of minimum wage laws, is typically explained in terms of demand substitution: where the rising minimum increases the demand for more-skilled workers who become relatively inexpensive compared to less-skilled workers. I show that workers will also respond to changes in the minimum wage by re-optimizing their labor supply since an increase in the minimum wage leads to lower compensating wage differentials. The resulting decline in labor supply at hedonically less desirable (and hence, higher paying) jobs could also cause the ripple effect. I combine labor market data on individuals with occupation-level hedonic data and provide evidence that the ripple effect is largely caused by labor supply substitution and not labor demand substitution as previously believed.

Keywords: Job Displacement, Tasks, Mismatch, Human Capital, Heterogeneous Treatment Effects Minimum Wage, Ripple Effect, Hedonic Wages.

Indexing (document details)
Advisor: Moffitt, Robert
Commitee: Spady, Richard, Wokersen, Tiemen
School: The Johns Hopkins University
Department: Economics
School Location: United States -- Maryland
Source: DAI-A 74/12(E), Dissertation Abstracts International
Subjects: Labor economics
Keywords: Heterogeneous treatment effects, Minimum wage, Mismatch, Ripple effect, Worker displacement
Publication Number: 3572708
ISBN: 978-1-303-39296-2
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