Job Market Paper

Minimum Wages and Optimal Redistribution

Abstract: This paper analyzes whether a minimum wage should be used for redistribution on top of taxes and transfers. I characterize optimal redistribution for a government with three policy instruments -- labor income taxes and transfers, corporate income taxes, and a minimum wage -- using an empirically grounded model of the labor market with positive firm profits. A minimum wage can increase social welfare when it increases the average post-tax wages of low-skill labor market participants and when corporate profit incidence is large. When chosen together with taxes, the minimum wage can help the government redistribute efficiently to low-skill workers by preventing firms from capturing low-wage income subsidies such as the EITC and from enjoying high profits that cannot be redistributed via corporate taxes due to capital mobility in unaffected industries. Event studies show that the average US state-level minimum wage reform over the last two decades increased average post-tax wages of low-skilled labor market participants and reduced corporate profits in affected industries, namely low-skill labor-intensive services. A sufficient statistics analysis implies that US minimum wages typically remain below their optimum under the current tax and transfer system.

Featured Papers

Placed-Based Redistribution

Abstract: Governments around the world redistribute to distressed areas by conditioning taxes and transfers on location. We show that when poor households are spatially concentrated, transfers from one location to another can yield equity gains that outweigh their efficiency costs, even when income-based transfers are set optimally. Expressions for the optimal transfer size depend on the mobility of households, the earnings responses of movers, and sorting patterns. Surveys find support for targeting tax credits to poor Americans who live in distressed places. A calibration exercise finds optimal transfers of the same order of magnitude as prominent American zone policies.

An Observational Implementation of the Outcome Test with an Application to Ethnic Prejudice in Pretrial Detentions

    • Coauthor: N. Grau. Updated Jul. 2021 (appendix). Revision requested at The Review of Economics and Statistics.

Abstract: We propose an observational implementation of the outcome test that uses predicted selection status to identify marginal individuals. We provide conditions under which selected individuals with lower propensity scores are more likely to be marginal given their observables and propose empirical diagnostics to assess their plausibility. Our approach requires neither instruments nor the random assignment of decision-makers, allows for unrestricted correlation between observables and unobservables, and can accommodate non-monotone patterns of discrimination. We illustrate our method by analyzing prejudice in pretrial detentions against the Mapuche, the largest ethnic minority group in Chile, and find strong evidence of prejudice against them.

Abstract: We use Bureau of Economic Analysis, census, and Current Population Survey data to study trends in income inequality across US states and counties from 1960–2019. Both states and counties have diverged in terms of per capita pretax incomes since the late 1990s, with transfers serving to dampen this divergence. County incomes have been diverging since the late 1970s. These trends in mean income mask opposing patterns among top- and bottom-income quantiles. Top incomes have diverged markedly across states since the late 1970s. In contrast, bottom-income quantiles and poverty rates have converged across areas in recent decades.

Abstract: Do policies and institutions matter for pre-tax income inequality? I build an annual panel of 43 countries for the period 1980–2016 to document cross-country facts. I find robust correlations between pre-tax income shares and economic policy—financial development, trade openness, government expenditure, and income taxation—even after controlling for economic development. I further find that proxies of institutional quality—e.g., state development, corruption, or political exclusion—mediate the relationship between top income shares and economic policy, in particular for trade openness and government expenditure. The role of institutions in allowing or limiting rent-seeking can rationalize the results.

Using Small Businesses for Individual Tax Planning: Evidence from Special Tax Regimes in Chile

Abstract: Many countries have special tax regimes (STRs) for small businesses. Even though these regimes may reduce compliance costs, they increase the complexity of the tax system and can be used by high-income individuals to avoid taxes. This paper uses administrative data from Chile to analyze whether the use of STRs is associated with strategic tax planning at the individual level. A descriptive analysis of the data finds three stylized facts that, taken together, are consistent with strategic behavior: STRs are used frequently, they are used mainly by high-income taxpayers, and high-income taxpayers are more likely to hold a portfolio of businesses filing taxes under STRs. We rationalize these facts with a simple model of small business creation and tax planning and test the model’s predictions. We find that following a reform that made a particular STR more restrictive, reported individual incomes from businesses filing under that STR decreased between 10 and 15%, while income reported from alternative sources increased. Overall Taxable Income increased between 4 and 7%. This increase is explained by the more restrictive scenario for avoiding taxes through STRs, consistent with individuals using these regimes for tax planning.

Directed Search, Minimum Wages, and Job Applications: Evidence from an Online Job Board (in progress)

Abstract: This paper explores a new mechanism that helps rationalize positive wage effects with limited employment effects after minimum wage hikes: the "application effects" of the minimum wage. An increase in the minimum wage generates a mechanical hike in labor costs for affected firms, eventually pushing employment downwards. However, the increase in the minimum wage may attract more applicants, making it easier for firms to fill vacancies. This effect may attenuate the increase in labor costs. We test this mechanism using data from the largest online job board in Uruguay for the 2010-2020 period combined with industry-by-occupation minimum wages defined in sectoral collective bargaining agreements. The data contains detailed information on vacancies, applicants, and applications, which we use to build indicators of minimum wage exposure at the vacancy-level using a combination of firm-level data and natural language processing techniques. At the descriptive level, we observe a positive correlation between posted wages and applications within occupations that are more substitutable between industries, namely clerical support workers, sales workers, and elementary occupations. The descriptive pattern is corroborated in a regression framework that exploits minimum wage adjustments as quasi-experimental variation using two different differences-in-differences designs, both at the industry-by-occupation- and at the vacancy-level. Both exercises suggest positive, finite, and significant elasticities of applications to wages that are consistent with the estimated firm-level labor supply elasticities from the empirical monopsony literature.

Sectoral Minimum Wages, Firms, and Wage Inequality: Evidence from Uruguay (in progress)

Abstract: This project uses ten years of matched employer-employee data from Uruguay's Social Security Administration to study the effects of a large reform on minimum wages on wage inequality. In 2005, the Uruguayan government substantially increased the (previously non-binding) national minimum wage and reinstalled historical wage councils organized by economic activity that define industry by occupation minimum wages on top of the national minimum wage. We document a massive decrease in wage inequality after 2005, which is almost exclusively explained by a decrease in the between-firm, rather than the within-firm, variance of log wages. An AKM decomposition confirms the importance of the firm component in the evolution of wage inequality. Preliminary results using a time-varying AKM model show a large compression in the dispersion of firm fixed-effects after the reform. Specifically, wage premiums of firms at the bottom of the fixed-effects' distribution seem to converge to the higher quantiles. Ongoing analysis further explores the role of firms, worker transitions, and the relative importance of the national and sector-specific wage institutions on the aggregate decrease of wage inequality.

Abstract: This paper studies a reform to the workers' compensation system in Argentina that established a mandatory first step after work-related accidents: workers were mandated to notify a government medical commission that determines the degree of disability, whether the injury is related to the worker's occupation, and the corresponding compensation, before any further legal action could be taken. Exploiting the staggered implementation of the reform across provinces, we find that the reform substantially reduced workplace lawsuits with no effect on reported accidents, thus generating efficiency gains in the labor market. Results suggest a noisy increase in employment in affected provinces of almost 2% after the reform, with no effects on wages or the number of active firms. When zooming at the sector-by-province level, we find that employment significantly increased by more than 5% one year after the reform in sectors that were most affected by litigiousness in the year prior to the reform --construction, mining, and manufacturing, with no corresponding increase in average wages.

Abstract: This paper tests for discrimination against immigrant defendants in the criminal justice system in Chile using a decade of nationwide administrative records on pretrial detentions. Observational benchmark regressions show that immigrant defendants are 8.6 percentage points less likely to be released pretrial relative to Chilean defendants with similar proxies for pretrial misconduct potential. Diagnostics for omitted variable bias --including a novel test to assess the quality of the proxy vector based on comparisons of pretrial misconduct rates among released defendants-- suggest that the discrimination estimates are not driven by omitted variable bias and that, if anything, failing to fully account for differences in misconduct potential leads to an underestimation of discrimination. Our estimates suggest that discrimination stems from an informational problem because judges do not observe criminal records in origin countries, with stereotypes and taste-based discrimination playing a role in the problem's resolution. We find that discrimination is especially large for drug offenses and that discrimination increased after a recent immigration wave.

Small Firms, Tax Avoidance, and Income Inequality: Evidence from Chile (in progress)

Abstract: This project combines the universe of individual income tax returns and business tax returns with detailed data on ownership shares to characterize business ownership in Chile since 2012. The analysis documents a substantial concentration of business ownership --both in terms of the number of businesses and profits-- at the top of the income distribution. This pattern holds regardless of firm size and tax regime, even for small firms that file taxes under (presumably progressive) special tax regimes for small businesses. The complexity of business portfolios also increases with income, affecting the effective tax rates of capital income earners at the top of the distribution. Ongoing analysis evaluates a big tax reform enacted in 2014 that made substantial changes to business taxation with the objective of reducing tax avoidance at the top.

Cómo diseñar impuestos: Teoría económica y evidencia empírica (in Spanish)

  • 2021. In Impuestos justos para el Chile que viene: Diagnóstico y desafíos tributarios para un nuevo pacto fiscal, edited by J. Atria and C. Otero (book website), Fondo de Cultura Económica. This is an overview of the optimal income tax literature for a non-specialized audience.

Abstract: Este capítulo se pregunta cómo deben diseñarse los sistemas tributarios para cumplir de la mejor manera posible los objetivos propuestos por el estado. Para ello, se presenta una síntesis de la literatura económica de impuestos óptimos la cual explora cómo son los sistemas tributarios que maximizan los objetivos del estado considerando tanto elementos normativos como los efectos económicos de los impuestos. El foco del capítulo son los impuestos al ingreso, pero también se discute brevemente como esta lógica afecta otros elementos del sistema tributario. Se argumenta que esta literatura concluye que los sistemas tributarios óptimos son usualmente progresivos, con tasas marginales altas y transferencias focalizadas, incluso tras reconocer que los impuestos pueden generar distorsiones. También, la literatura sostiene que ampliar las bases tributarias permite minimizar las distorsiones de la redistribución. El capítulo termina discutiendo qué lecciones de esta literatura son particularmente relevantes para pensar reformas atingentes al caso chileno.

Abstract: Statistical discrimination is usually flagged by economists as a potential source of treatment disparities. The literature, however, lacks reduced-form tests that provide information about the relative importance of statistical discrimination in explaining aggregate patterns. This article explores whether combining three different diagnostics of aggregate discrimination --those being, unconditional treatment disparities, benchmark tests, and outcome tests-- can provide insights into sources of statistical discrimination. We discuss the difficulties concomitant with this exercise and argue, using an identification result that relies on restrictive (and presumably implausible) assumptions, that the answer is most likely negative.

Ambiguity and Long-Run Cooperation in Strategic Games

Abstract: We study the effects of ambiguity on long-run cooperation in infinitely repeated strategic games. Using a simple parametric model of ambiguity, we study conditions for sustaining cooperative equilibria in the long-run. We apply our framework to the prisoner’s dilemma and duopoly models. We find that (i) ambiguity may affect the game’s structure eventually making the noncooperative equilibrium ex ante preferred; (ii) higher levels of ambiguity make long-run cooperation less likely since it makes punishment schemes less effective; and (iii) large levels of ambiguity may preclude the possibility of mutually beneficial long-run agreements, even when cooperation is beneficial from an ex ante perspective.