Title: Essays in Economics on Liberalization and Reallocation
Description: A central concern in economics is explaining the allocation of resources, its consequences for economic activity and the distribution of the associated economic revenues. This dissertation contains three essays examining the average and distributional effects of reallocations resulting from liberalization reforms or trade shocks. Chapter 1 examines the distributional effects of trade liberalization. A vast literature demonstrates that liberalization is associated with higher wage inequality. Nearly the entire literature considers comparative statics or steady states, which ignore dynamics and of necessity feature monotonic changes. I address these limitations by developing a micro-founded model that emphasizes the dynamics of reallocation between heterogeneous firms and workers in the presence of costly labor adjustments. Trade liberalization provides firms both new export markets and new sources of competition. Expanding high-paying firms increase wages to recruit better workers faster.

Workers at firms threatened by competition accept wage cuts to delay their employers' exit and keep their job. This provides novel implications for both aggregate and within-firm inequality across a distribution of firm types. I show that key mechanisms of the model are consistent with a wide range of facts, some of which being examined in greater details in chapter 2. Results from the calibrated model suggest an overshooting of inequality on the path to a new steady state. This is consistent with evidence based on an event study of recent liberalization episodes. Inequality appears to peak about six years after liberalization, with one-fourth of the overshooting disappearing in the following ten years. Chapter 2 investigates the effects of firm growth on hiring and separations. I contribute to the literature on worker flows by studying the wages and characteristics of new and separated workers. First, I show that separations are an essential and robust component of firm growth. I argue that this may be the result of a more intense search for better matches at faster growing firms.

Second, I find that wage offers to new hires increase with firm hiring rates. This is partly the result of the selection of more experienced workers. However fixed unobservable and variable observable worker characteristics cannot fully explain this relationship: the residual wage of new hires is significantly associated with the firm hiring rate. We interpret this as direct evidence of the firm-level upward-sloping labor supply curve predicted by the canonical models. We provide estimates of the slope of the curve using an instrumental variable approach to control for supply shocks. We find that a 10% increase in the hiring rate results in a wage increase of 1%. In chapter 3 Jaromir Nosal, Jonathan Vogel and I ask the following: What is the contribution of industry reallocation and productivity changes to the economic gains resulting from banking deregulation? How does local industrial structure determine the outcomes of banking deregulation? This chapter uses the staggered reforms of the banking sector in the U.S. between 1977 and 1997 to empirically investigate these questions.

In the private sector, we show that the deregulation-induced reallocation of workers was directed towards industries with lower GDP per worker. Moreover, employment gains were associated with a reduction in productivity. Nevertheless we find that these effects are offset by across the board within-industry productivity gains. In addition, total output and aggregate productivity increased because of the reallocation of workers out of unemployment, self-employment and non-private industries towards the more productive private sector. Finally we find that initial industry mix can explain up to one third of the variation in state aggregate responses.