Employment Inequality, Labour Income Dynamics and Household Consumption

• Author / Creator

  Chiparawasha, Francis

• This thesis has five chapters. Chapter 1 introduces the thesis. Chapter 2 uses a search and matching model that incorporates labour demand, labour supply, labour market efficiency, search effort and nonemployment duration dependence of job-finding rates to examine the leading cause(s) of a rise in employment inequality (divergence of employment rates) between low- educated and high-educated men in Canada. In the model, workers differ in education attainment, ability, and search effort, and firms post vacancies to attract workers. The widening employment gap results from shifts in how workers supply labour, exert job search effort, the skills firms prefer to hire and the ruggedness of the matching process. This model is calibrated to match the rise in employment inequality between 1990 and 2019 and perform counterfactual experiments. The results indicate that changes in labour supply (e.g., shifts in preference for leisure and generosity of government programs) is the primary cause of the rise in inequality, while improvements in job search technology reduced the employment gap. Chapter 3 provides a guide to estimating the canonical income pro- cess widely used in macro and labour economics that includes autoregressive, transitory, and fixed effect components using quasidifferences. Estimation in quasidifferences has its advantages over estimations in levels and differences, yet it is rarely used in practice, and nothing is known about its effectiveness. The chapter provides a catalog of biases in the estimated parameters for various N, T, initial conditions, and weighting schemes using Monte Carlo simulations. The chapter also applies the quasidifferences method to Danish administrative data on male earnings. The method yields divergent estimates of the autoregressive parameter for different weighting schemes, which conforms to the simulated results. In particular, the estimates are divergent when the variance of transitory shocks is higher than that of permanent shocks, true persistence is high, and the variance of the permanent component in the first sample year is nonzero. Lastly, the chapter applies quasidifferences to income and consumption data from a calibrated standard incomplete-markets model. The income and consumption data allow the joint estimation of the income process parameters and consumption insurance against permanent and transitory shocks. The results show that estimation in quasidifferences yields significant biases in the autoregressive parameter and the estimated insurance of shocks. All these findings warn against the routine use of estimation in quasidifferences. However, the income process parameters can be reliably estimated using quasidifferences only when the variance of permanent shocks is higher than that of transitory shocks, and one uses equal weighting of the moments. Chapter 4 uses the methodology of Blundell et al. (2008) to estimate the degree of household consumption insurance and the primary sources of this insurance in South Africa during the period 2008-2017. Household income shocks can be detrimental to families’ well-being, especially in developing countries where the level of consumption for many families is already close to subsistence. In the chapter, income shocks can either be transitory or permanent, and the ability of households to smooth these in- come shocks depends on available resources. Because families have access to limited resources, they can only partially cushion consumption from the income shocks. The results indicate that households have almost full insurance against transitory shocks and can insure about 31 percent of the permanent income shocks. The degree of consumption insurance also differs by education, region of residence, race and age. The results also show that income from private transfers is more effective at smoothing consumption than public transfers. Lastly, Chapter 5 provides concluding remarks.

• Subjects / Keywords

  • employment
  • employment inequality
  • quasidifferences
  • canonical income process
  • consumption insurance

• Graduation date

  Spring 2023

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/r3-zt1p-4t15

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.