Job Market Paper

What are the implications of imperfect competition in labor markets for optimal labor income taxes? I study this question in an Aiyagari (1994) incomplete-market economy with idiosyncratic risk, borrowing constraints, and the new feature that jobs are differentiated from workers' perspective and firms have wage-setting power. First, under a restricted class of tax policies, as in Heathcote et al. (2017), the government can choose taxes such that the allocation coincides with that implied by optimal taxes in an economy with competitive labor markets. Second, I develop intuition for this result by studying unrestricted tax policies in a static economy with fixed heterogeneity in skills. In particular, I provide analytical expressions that relate optimal taxes with and without labor market imperfections in this environment to their counterparts in the Aiyagari economy. Third, when calibrated to recent measures of labor market power, optimal taxes in the Aiygari economy increase welfare by 0.2% and output by 0.9% relative to US policy. Optimal taxes are less progressive, and implied markdowns are narrower. Finally, I provide expressions for how equilibrium markdowns are determined by the distribution of workers' assets and productivity, and use these to unpack how changes in borrowing constraints and idiosyncratic risk affect labor market power and hence optimal taxes.

Working papers

Growth Effects of Labor Market Frictions

[Draft coming soon]

In this paper, I examine the effects of a particular labor market friction---firing cost---on long-run economic growth in a theoretical framework. The key point for these analyses is the linkage between the ratio of young-to-old workers and biased technological change. The channel through which a change in the structure of the labor market affects growth is through the size of the rent available to the producers of technology---profit-seeking research firms. I employ a model of directed technological change in an overlapping generation setup with old and young workers. The new technology (machines) affects the productivity of workers heterogeneously and in favor of young workers, and as a result, firms' preferences for different labor are determined by the technological bias and the wage structure. On the other hand, the research firms' behavior is affected by the demand for their products, which depends on the ratio of young-to-old workers. A change in the structure of the labor market alters the relative cost of labor, changes the young-to-old ratio, and consequently the R&D production.

The Great Collision: Megatrends, Interest Rates, and the Macroeconomy, with Vimal Thakoor (IMF)

[Draft coming soon]

Climate change, demographic transitions, and technological advancements are the megatrends that will reshape the global economy. While their overall long-term effects remain subject to uncertainty, it is definite that there will be significant macroeconomic ramifications. This paper studies the implications of these megatrends for global interest rates and capital flow. We develop an open economy model with overlapping generations and aggregate shocks. Climate change goes into effect through an increase in the risk of natural disasters---destruction of capital and disruption of production---and a decline in labor productivity. Demographic transitions change the old-age dependency ratio and technological changes affect the total productivity factor growth. We examine the solo and combined effects of an increase in the risk of natural disaster shocks, demographic changes, and TFP growth on the interest rate in a closed-economy. We extend the framework to a North-South model and calibrate to the US and South Africa to quantitatively assess the effect of differential changes on capital flow between the two countries.