UBC Theses and Dissertations

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UBC Theses and Dissertations

Essays on dynamics of household and firm choices Mitra, Aruni


For nearly four decades in the post-War United States, productivity rose during economic booms and fell in recessions. The first chapter of this thesis studies how increased labour market flexibility because of rapid de-unionization since the early 1980s can explain the sudden vanishing of this procyclicality of productivity, the so-called 'productivity puzzle'. Falling costs of hiring and firing workers, due to the decline in union power, prompted by firms to rely more on employment adjustment (extensive margin) instead of changing workers' effort through labour hoarding (intensive margin). High dependence on labour hoarding explains productivity's historical procyclicality, and its reduced importance in recent decades explains why productivity is now less procyclical. Increased hiring and firing of workers also imply a rise in the relative volatility of employment. I show that U.S. states and industries with a larger drop in union density experienced a deeper fall in the procyclicality of productivity and a larger increase in the relative volatility of employment. Simultaneous to the productivity puzzle in the mid-1980s, there were other important structural changes in the U.S. economy, namely, the rise of the service sector, increased use of intangible capital, more accommodative monetary policy, and the decline in the volatility of shocks during Great Moderation. The second chapter shows that none of these structural changes can explain the productivity puzzle. However, allowing the hiring cost to decline between pre- and post-1980s in an otherwise standard New Keynesian model with endogenous effort can match almost all the fall in cyclical productivity correlations and the rise in the relative volatility of employment. The third chapter characterizes the joint evolution of cross-sectional inequality in permanent income and consumption among parents and children in the U.S. We use a model of intra-family persistence across generations to estimate the parameters determining inequality of consumption and income within a generation. In accounting for cross-sectional dispersion, we find that idiosyncratic heterogeneity is quantitatively more important than inequality arising from family factors. This suggests that parents provide limited insurance against idiosyncratic life-cycle risk, even though the levels of permanent income and consumption exhibit significant persistence across generations.

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