We provide a number of insights into the nature and consequences of monopsony power through the lens of comparative advantage, where employers' power in wage setting stems from match-specific rents. Chief among them is that employers will apply larger wage markdowns to workers with greater comparative advantage at their firm. This leads to stronger monopsony power over more productive workers, provided the workers' comparative advantage aligns with their absolute advantage. Using Brazilian administrative data, we confirm this prediction: monopsony disproportionately affects high-wage workers within firms and workers at high-paying firms. The model, calibrated to our estimates for Brazil, predicts that minimum wages increase both wages and formal employment for more productive workers while pushing less productive workers out of formal employment.

Many households hold little wealth. In standard precautionary savings models, these households should not only display higher marginal propensities to consume (MPCs) but also higher future consumption growth. In contrast, we see from the Panel Study of Income Dynamics that such "hand-to-mouth" households do not display higher growth in spending. They also exhibit greater volatility of spending and adjust their spending to a greater extent through the number of categories consumed. Consistent with a role for preference heterogeneity, the panel data show that it is persistent differences across households, not current assets, that predict low consumption growth and other spending differences for the hand-to-mouth households. To identify the extent of preference heterogeneity, we consider the model of Kaplan and Violante with both liquid and illiquid assets, but allow heterogeneity in preferences. To match the data, many poor hand-to-mouth must be relatively impatient and have a high inter-temporal elasticity of substitution. The model shows that preferences predominantly explain the higher MPCs for low-asset households. Preference heterogeneity notably increases the spending impact of fiscal transfers, but only if targeted, while reducing that from interest rate cuts.

Given worldwide trends in education, wage premium for schooling, and real GDP, we derive a lower bound for the long-run elasticity of labor substitution across schooling groups of around 4, which is far higher than values commonly used in the literature. We exploit our bound to reexamine the importance of human capital in cross-country income differences, including the roles of school quality versus the skill bias of technology in the greater efficiency gains from schooling in richer countries. ( JEL E23, E24, I26, J24, J31, O15)

Economic growth is typically measured in per capita terms. A long tradition in philosophy, however, suggests that social welfare may depend on the number of people as well. To illustrate how much this matters quantitatively, we decompose social welfare growth—measured in consumption-equivalent (CE) units — into contributions from rising population and rising per capita consumption. Because of diminishing marginal utility from consumption, population growth is scaled up by a value-of-life factor that empirically averages nearly 3 across countries since 1960. Population increases are therefore a major contributor to growth if one takes a total rather than per capita view. CE welfare growth around the world averages more than 6% per year since 1960 as opposed to 2% per year for consumption growth. Countries such as Mexico and South Africa rise sharply in the growth rankings, whereas China, Germany, and Japan plummet. These results are robust to incorporating richer individual preferences and endogenous fertility using time-use data from the U.S., Mexico, the Netherlands, Japan, South Africa, and South Korea.

Typical measures of wages, such as average hourly earnings, fail to capture cyclicality in the effective cost of labor in the presence of (i) cyclical fluctuations in the quality of worker-firm matches, or (ii) wages being smoothed within employment matches. To address both concerns, we estimate cyclicality in labor's user cost exploiting the long-run wage in a match to control for match quality. Using NLSY data for 1980 to 2019, we identify three channels by which hiring in a recession affects user cost: It lowers the new-hire wage; it lowers wages going forward in the match; but it also results in higher subsequent separations. All totaled, we find that labor's user cost is highly procyclical, increasing by more than 4% for a 1 pp decline in the unemployment rate. For large recessions, like the Great Recession, that implies a decline in the price of labor of about 15%.

We consider a matching model of employment with flexible wages for new hires but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort’s response can greatly increase wage inertia. (JEL E24, J23, J31, J41, M51)

We propose a methodology exploiting time diary data and “leisure Engel curves” to infer quality changes across leisure activities and measure the effects on the marginal return to leisure. We study leisure returns for men aged 21–30, who have shifted leisure toward video gaming and recreational computing and have had larger market work hour declines than older men or women since 2004. We show that recreational computing is distinctly a leisure luxury for younger men. By increasing the value of time, innovations to this leisure technology have lowered young men's work hours by 2%, or much of their work hours decline compared to older men's.

The ratio of revenue to inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation which hinders aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error. Our method exploits how revenue growth is less sensitive to input growth when a plant’s average products are overstated by measurement error. For Indian manufacturing from 1985–2013, our correction lowers potential gains from reallocation by 20%. For the U.S. the effect is even more dramatic, reducing potential gains by 60% and eliminating 2/3 of a severe downward trend in allocative efficiency over 1978–2013.

Revenue per unit of inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation, which lowers aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error in revenue and inputs. Applying our correction to manufacturing plants in the U.S. eliminates an otherwise mysterious sharp downward trend in allocative efficiency from 1978–2007. For Indian manufacturing plants from 1985–2011, meanwhile, we estimate that true marginal products were only one-half as dispersed as measured average products. ∗We are grateful to seminar participants at Cornell, IIES, MIT/Harvard, Princeton, Rochester, Stanford, Toronto, and the Federal Reserve Banks of Cleveland, Minneapolis, Philadelphia, and New York for comments. We are especially grateful for comments from Joel David. Opinions and conclusions herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. 2 BILS, KLENOW AND RUANE

Employment and hours are more cyclical than dictated by productivity and consumption. This intratemporal labor wedge can arise from product or labor market distortions. Based on employee wages, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because wages may be smoothed versions of labor's true cyclical price, we instead examine the self-employed and intermediate inputs, respectively. For recent decades in the United States, we find price markup movements are at least as cyclical as wage markup movements. Thus, countercyclical price markups deserve a central place in business-cycle research, alongside sticky wages and matching frictions. (JEL E24, E32, E63, J31, J41)

The spending choices of those who consume hand-to-mouth should, conditional on in- come, be relatively routine and predictable. Based on data from the Panel Study of Income Dynamics and Consumer Expenditure Surveys, we show this is not the case for households the literature has treated as most likely hand-to-mouth. Those with little wealth, or little liquid wealth, relative to income: (1) display more volatile expendi- tures, even adjusting for their income ow, (2) shift expenditures more dramatically across spending categories, (3) spend on fewer categories than other households with similar total expenditures. Based on these ndings, we entertain that such households, those ostensibly hand-to-mouth, dier in objectives from households that exhibit more savings and liquid wealth. Less diminishing returns in consuming can explain these three features of spending by low-wealth households. It can also partly explain why such households display lower savings and, especially, lower liquid savings -- that is, these households' elastic preferences yield choices that add to their appearance as hand-to- mouth.

Younger men, ages 21 to 30, exhibited a larger decline in work hours over the last fifteen years than older men or women.Since 2004, time-use data show that younger men distinctly shifted their leisure to video gaming and other recreational computer activities.We propose a framework to answer whether improved leisure technology played a role in reducing younger men's labor supply.The starting point is a leisure demand system that parallels that often estimated for consumption expenditures.We show that total leisure demand is especially sensitive to innovations in leisure luxuries, that is, activities that display a disproportionate response to changes in total leisure time.We estimate that gaming/recreational computer use is distinctly a leisure luxury for younger men.Moreover, we calculate that innovations to gaming/recreational computing since 2004 explain on the order of half the increase in leisure for younger men, and predict a decline in market hours of 1.5 to 3.0 percent, which is 38 and 79 percent of the differential decline relative to older men.

Stockouts bear an inverse relation to the price markup in models with a stockout constraint on sales because stockouts cost the seller the markup of price over marginal cost. I examine stockouts in micro-CPI data, for goods comprising more than a quarter of consumer expenditures, to deduce the level and cyclicality of markups for 1988–2009. The predictable increase in stockouts, as price declines, over durables׳ product life implies markups on the order of 15 percent. For much of the sample period stockouts were acyclical, suggesting markups were acyclical. But for the latter part of the sample, including the Great Recession, stockouts are procyclical consistent with countercylical markups.

We revisit to what extent the increase in income inequality since 1980 was mirrored by consumption inequality. We do so by constructing an alternative measure of consumption expenditure using a demand system to correct for systematic measurement error in the Consumer Expenditure Survey. Our estimation exploits the relative expenditure of high- and low-income households on luxuries versus necessities. This double differencing corrects for measurement error that can vary over time by good and income. We find consumption inequality tracked income inequality much more closely than estimated by direct responses on expenditures. (JEL D31, D63, E21)

Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called "the labor wedge" — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The intratemporal wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Looking at the past quarter century in the United States, we find that price markup movements are at least as important as wage markup movements — including during the Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

Accumulation of financial balances that with hindsight appear excessive preceded the Great Recession and the euro crisis, and motivates efforts toward macroprudential regulation of financial markets. Regulation in labor markets is more pervasive than in financial markets (and at least as controversial), and the crises and booms that trigger sudden asset price swings generate slower but longer waves in the labor market: employment rose before and collapsed after the crises, and persistently high unemployment still exacts high human costs in their aftermath.

Employment and hours appear far more cyclical than dictated by behavior of productivity and consumption. This puzzle has been labeled the labor - a cyclical wedge between marginal product of labor and marginal rate of substitution. The wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on wages of employees, literature has attributed wedge almost entirely to labor market distortions (see, e.g., Gali, Gertler, Lopez-Salido (2007) or Karabarbounis (2013)). Because employee wages may be smoothed versions of true cyclical price of labor, however, we instead decompose labor wedge using data on intermediate inputs, work-in-process inventories, and self-employed. We find that price markup movements are just as important as wage markup movements -- including in Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical price markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

According to the textbook Keynesian model, short-run demand for labor is sensitive to the demand for goods. In this view, sellers deviate from setting the marginal product of labor proportional to the real wage, instead enduring or choosing lower price markups when demand for goods is high. We test this prediction across U.S. industries in the two decades up through the Great Recession. To identify movements in goods demand, we exploit how durability varies across 70 categories of consumption and investment. We also take into account the flexibility of prices and capital-intensity of production across goods. We find evidence in support of Keynesian Labor Demand.