Essays on Government Transfers and Labor Markets

Abstract

This dissertation consists of three chapters. In the first chapter, I document a small spousal earnings response to the job displacement of the family head. The response is even smaller in recessions when earnings losses are larger and additional insurance is most valuable. I investigate whether the small response is an outcome of crowding-out effects of existing government transfers. To accomplish this, I use an incomplete asset markets model with family labor supply and aggregate fluctuations whose predicted spousal labor supply elasticities with respect to transfers are in line with microeconomic estimates both in aggregate and across subpopulations. In this model, counterfactual experiments indeed show that generous transfers in recessions discourage spousal labor supply significantly after the head's job displacement. Then, I solve for optimal means-tested transfers paid to poor families and employment-tested transfers paid to the unemployed. Unlike the current policy that maintains generous transfers of both types in recessions, I find that the optimal policy features procyclical means-tested and countercyclical employment-tested transfers. The second chapter (joint with Kurt See) studies the optimal design of unemployment insurance (UI) over the business cycle, paying particular attention to the effects of generous UI payments on firm vacancy creation. While UI provides insurance to jobless individuals, generous UI payment results in higher reservation wages, a corresponding reduction in firm vacancy creation, both of which lead to a decline in the job finding rate. Using a heterogeneous agent job search model, designed to consider the effects of UI on labor demand, we find that optimal UI policy should be countercyclical. Finally, the third chapter (joint with Anmol Bhandari, Ellen McGrattan, and Kurt Gerrard See) examines the reliability of widely used surveys on U.S. businesses. We compare survey responses of business owners with administrative data and document large inconsistencies in business incomes, receipts, and the number of owners. We document problems due to nonrepresentative samples and measurement errors. Nonrepresentativeness is refected in undersampling of owners with low incomes. Measurement errors arise because respondents do not refer to relevant documents and possibly because of framing issues. We conclude that predictions based on current survey data should be treated with caution.