Publications
Trade Shocks and Higher-Order Earnings Risk in Local Labor Markets, joint with Ursula Mello. 2024. International Economic Review, vol 65, no 4, pp 1717-45.
Best Paper in Macro at the 44th Meeting of the Brazilian Econometric Society
[Abstract | Paper | Working Paper (with Online Appendix) | BSE Blog Post]
This paper investigates the relationship between international trade and asymmetrical labor income risk. Using the case study of Brazil, we inspect how an increase in import penetration following the China shock impacted the distribution of idiosyncratic earnings changes across the country’s local labor markets. We find that an increase in import penetration leads to a more dispersed and negatively skewed distribution. These effects can be explained by an increase in the volatility of hours worked following job and industry transitions, particularly from involuntary job separations. Moreover, the observed increase in the dispersion of the distribution across the years suggests a temporary rise in the persistent risk, stemming from the broad reallocation of labor following the trade shock. Through the lens of an incomplete market model, individuals would be willing to forgo as much as 1.8% of consumption to avoid the riskier labor market.
Public Financing with Financial Frictions and Underground Economy, joint with Andrés Erosa and Luisa Fuster. 2023. Journal of Monetary Economics, vol 135, pp 20-36.
[Abstract | Paper | Working Paper (with Online Appendix) | Slides | Non-technical discussion about the paper (in Portuguese)]
What are the aggregate effects of informality in a financially constrained economy? We develop and calibrate an entrepreneurship model to data on matched employer-employee from both formal and informal sectors in Brazil. The model distinguishes between informality on the business side (extensive margin) and the informal hiring by formal firms (intensive margin). We find that when informality is eliminated along both margins, aggregate output increases 9.3%, capital 14.7%, TFP 5.4%, and tax revenue 37%. The output and TFP increases would be much larger if informality were only eliminated on the extensive margin, a result that supports the view that the informal economy can play a positive role in an economy with financial frictions. Finally, we find that the output cost of financing social security in our baseline model is about twice as large as the one in an economy with no frictions.
Working Papers
Minimum Wage, Business Dynamism, and the Life Cycle of Firms, joint with André Victor Luduvice and Alexandre Sollaci. 2024.
[Abstract | Draft | IDB Working Paper]
This paper studies the effects of the minimum wage on the life cycle of firms. We first build a tractable model where heterogeneous firms have labor market power, invest in innovation, and choose formal or informal sectors. The model predicts that a minimum wage hike not only shrinks the young and low- productivity firms but also lowers the incentives to innovate, resulting in a lower life cycle growth. We then test the predictions of the model using Brazilian administrative and census data leveraging the variation in exposure across establishments and municipalities to the large increase in the minimum wage between 1999 and 2010. At the establishment level, an increase in the minimum wage: (i) decreases the growth rates of small and young establishments and (ii) increases the growth rates of old and large establishments. When analyzing exposed municipalities, we observe an increase in the earnings of workers in both the formal and informal sectors, as well as informal employment. Our findings suggest that the minimum wage is a possible explanation for the decline in the importance of young establishments and business dynamism in Brazil.
Revisiting the Facts of Economic Growth: insights from assessing misallocation over 70 years for up to 100 countries, joint with Thiago Trafane Oliveira Santos. 2024.
[Abstract | Draft | BCB Working Paper]
Assessments of the role played by misallocation in shaping total factor productivity (TFP) have been hindered by constraints in the availability of firm-level data. This paper addresses this issue by developing a static Cournot model that primarily requires standard macroeconomic data to estimate market-power-driven misallocation. We apply this framework to decompose aggregate TFP into technology and allocative efficiency components from 1950 to 2019 for up to a hundred countries from the Penn World Table 10.01. Utilizing this decomposition, we revisit key facts of economic growth. On the one hand, we evaluate the world income frontier as proxied by the US, finding that changes in misallocation can significantly impact short-run growth. On the other hand, we examine the economic performance around the world. Misallocation enhances our understanding of cross-country income differences, even though a substantial unexplained portion persists. We also find a lack of convergence in allocative efficiency, suggesting market-power-driven misallocation is linked, in the long run, to long-lasting country-specific factors such as institutions.
Disentangling Brazilian TFP: the role of misallocation in recent economic cycles, joint with Thiago Trafane Oliveira Santos. 2024.
[Abstract | Draft | BCB Working Paper]
This paper investigates the role of market-power-driven misallocation in shaping TFP during recent economic cycles in Brazil, using the static Cournot model of Martinez and Santos (2024). The model primarily relies on macroeconomic data for calibration, allowing us to decompose Brazil’s national TFP into technology and allocative efficiency components from 2000 to 2019. Over these two decades, we observe an upward trend in allocative efficiency, reflecting an increase in the labor income share and a corresponding decrease in the average markup, in sharp contrast with most developed countries. Our results further indicate that the cycles in Brazilian TFP are largely driven by allocative efficiency, with the mid-2000s economic boom mainly attributed to efficiency gains. In contrast, the technology component grows more steadily, around 0.9% per year, suggesting it reflects structural characteristics of the economy. Since allocative efficiency is bounded, this 0.9% annual growth rate can be interpreted as the current long-run growth level of TFP in Brazil.
Misallocation and Human Capital Accumulation over the Life Cycle, joint with Zoubir Benhamouche. 2022.
[Abstract | [Draft (under request)]]
We develop a life cycle occupational choice model with worker and firm heterogeneity and endogenous human capital accumulation. We calibrate the model to the United States using data on schooling and firm size and use it to study the effect of size- dependent distortions in skill accumulation and productivity. In an application to North African countries, we found that removing the size-dependent distortions increases GDP per capita of North African countries by a range of 2.75 times to 4.5 times, a result that is largely accounted for by the human capital accumulation of workers during the life cycle. Increasing the fraction of high-skill workers to the level of the U.S. without addressing firm-level misallocation falls short in closing the gap between developing and developed countries. These results support the view that the lack of incentives and opportunities for human capital accumulation is an important cause of differences in output per capita in developing economies.
Wage Inequality and Occupation Polarization: A Dynamic Perspective. 2019.
[Abstract | Draft]
In this paper, I argue that job polarization, the disappearing of middle wage occupations, can have long lasting effects in the U.S. wage structure. I suggest that, by changing the cross-cohort occupational structure, polarization can impact returns to experience and future wages. Firstly, I document that polarization has different impact across workers of different ages and education. Young workers disproportionally moved to low and high wage occupations in comparison to old workers, with significant differences between educational groups. Secondly, I document substantial heterogeneity in the level and growth of the returns to experience by occupation. Using an overlapping generations model with endogenous education and occupational choice, I show that if there exist complementarities between young and old labor, job polarization can affect the returns to experience. Quantitatively, I use the model to estimate the effect of technological and demographic changes in the U.S. wage structure accounting for the transition dynamics. During the transition, because of cohort imbalances and occupation switching costs, inequality is higher: college premium can be almost 10% higher than in the steady state and the relative wage of the median with respect to the top occupation is 12% worse. This culminates in a clear policy recommendation: the decrease of occupation switching costs, accelerating the transition and increasing wages of vulnerable groups.
Work in Progress
Gender and Top Lifetime Earnings Inequality in Brazil, joint with Ursula Mello and Antonio Martins-Neto.
