Title: Essays in Microeconomics
Description: This dissertation contains three essays in microeconomics. Using descriptive analyses andcausal inference techniques, it examines the role that institutions play in determining children’s human capital investments, adults’ wages, and whether older workers are independent contractors. Chapter 1 explores how children’s human capital development is affected by the interactions between automatic grade promotion, tuition reduction, and rainfall. An important feature of rural life is that children participate in farming. One consequence of this fact is that when there is increased demand for agricultural labor children are more likely to be kept out of school, lowering their human capital. When policymakers implement reforms an important consideration should be whether children’s labor supply elasticity can be affected—will increased labor demand result in them being more likely to stay out of school. Estimating these interactive effects is generally difficult because of the need for several sources of exogenous variation.

This paper interacts quasi-random rainfall shocks as a shifter to the demand for child labor and two education reforms in India—automatic promotion of children to grade 8, and a large reduction in fees at government-run schools—to examine whether the policy changes interact with the demand for child labor and whether the two policy reforms interact with one another. I find that tuition reduction increases children’s elasticity of labor supply. Higher rainfall reduces test scores, but when tuition is lowered, the effect of rainfall on test scores is more negative. There are also interactive effects between social promotion and tuition elimination. For children with the average level of treatment, tuition reduction increases test scores by 7% of a standard deviation. The effect of tuition reduction is lower for children who receive an additional year of automatic promotion, only 4.7% of a standard deviation. These results demonstrate that there are interactions between child labor and education policy, which can potentially undermine any beneficial impact of reforms.

Future work should examine the mechanisms behind these findings, to better understand families’ decision-making in response to changing education policy. Chapter 2 studies how firms share rents with workers, and the role of labor market institutionsin determining which workers receive rents. Firms can decide whether to produce some goods and services in-house or purchase them from the market. Increasingly, they are purchasing from the market—using subcontractors, temp agencies, and other outsourced labor. Low-wage workers’ wages decline when they are outsourced, but little is known about how outsourcing affects remaining workers. If firms are rent sharing, outsourcing might increase remaining workers’ earnings because there are more rents or fewer workers to share them with. This paper measures the impact of occupational layoff (OL) outsourcing, where firms outsource some occupations, on the earnings and separations of workers who remain employed by those firms. Using employer-employee data based on German social security records in a dynamic difference-in-differences design, outsourcing increases remaining workers’ long-run earnings by 6% in a sample of 260 OL outsourcing events.

Remainers are also more likely to stay at the outsourcing firm—outsourcing decreases the probability of remainers switching firms by 7.5 percentage points. Higher earnings and fewer separations are consistent with remainers receiving additional rents. Earnings gains are larger for workers in the bottom-half of the within-firm earnings distribution. Outsourcing only increases remainers’ earnings in firms with collective bargaining agreements (CBAs). In firms with CBAs, outsourcing increases remainers’ long-term earnings by 6%. In firms without CBAs, outsourcing lowers shortterm earnings by 3%. The results are consistent with a model of wage setting where outsourcing firms with CBAs need to compensate remainers. When there is no CBA, firms do not compensate remainers and can lower their wages. Analyzing the impact of outsourcing on within-firm and overall wage inequality, a typical outsourcing event in the sample lowers the within-firm Gini index by 2.5% as low-wage workers leave the firm and low-wage remainers are compensated.

Using Recentered Influence Functions, increasing the share of workers part of an outsourcing event by 10 percentage points (from a baseline of 11.7%) increases the top of the earnings distribution by approximately 1-1.5%, and the overall Gini index by 1%. Remainers are relatively high-wage, and outsourcing increases their earnings. By not accounting for this effect, prior studies likely underestimate the total impact of outsourcing on earnings inequality in Germany. Chapter 3 studies the role that labor market demand shocks play in no just whether workersare employed, but the types of contracts they are employed in, especially as they age. Independent Contracting is an employment relationship where workers have fewer legal protections relative to traditional employment. At the same time, workers in these contracts are generally hired to provide defined tasks, and cannot be controlled by their employer to the same degree as regular employees. However, little is known about why firms decide to use contractors as opposed to regular employees.

In a simple framework with uncertainty and fixed costs, contracting occurs when there is a mismatch between worker and firm type—either the worker or firm can do better in the next period, so they agree to a short-term contract. Under this framework, contracting can be driven by market factors. Negative labor demand shocks have an ambiguous predicted effect on the use of contractors as (1) employees become contractors and (2) contractors become unemployed. Which effect dominates is tested using data on two negative labor demand shocks—the China Shock and the Housing Wealth Shock from the Great Recession. In both instances, negative labor demand reduces the probability that workers are independent contractors, conditional on being employed in a given industry and occupation. From a baseline of 6.9% of 18-65 year olds employed as contractors, moving from the 25th to 75th percentile of the China Shock reduces contractor probability by 0.8 percentage points, while moving from the 25th to 75th percentile of the Housing Wealth Shock reduces the probability that a worker is an independent contractor by 3.75 percentage points.

These demonstrate that economic downturns reduce the overall share of contractors, suggesting that contracting is mostly used on the margin as a supplement to regular employer-employee relationships, rather than as a replacement for those relationships.