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ISER Internal Seminar: Adaptation Costs and the Business Cycle Effects on the Postgraduate Wage Premium Internal seminar

Sandwiches from 12:15, Seminar at 12:30

Using U.S. data, I document a new fact that the wage gap between those with postgraduate and bachelor degrees is countercyclical – postgraduates have smaller wage shocks than bachelor graduates over the business cycle. I argue the reason for this phenomenon is the adaptation costs due to the relatively low productivity of new hires who need time to adapt to their jobs. These adaptation costs reduce the value of workers’ outside options and thus the degree to which firms will offer contracts with smoother wages. I provide empirical evidence that postgraduates have higher adaptation costs than bachelor graduates. why we need structural modelTo understand how adaptation costs affect wage cyclicality, I develop an equilibrium search model with aggregate shocks. In the model, imperfect monitoring of workers’ effort creates a moral hazard problem that requires firms to pay an efficiency wage and restricts risk-sharing between firms and workers. Workers with higher adaptation costs have more to lose when they leave the current jobs, so they exert more effort regardless of what the firm offers, which alleviates moral hazard and improves risk-sharing. The estimation shows that adaptation costs alone can explain the differences both in the labour market turnover rates and in the wage cyclicality between postgraduates and bachelor graduates. The model also shows that postgraduates will accept relatively lower starting wages, but have faster wage growth. Finally, I find that unemployment insurance (UI) crowds out firm insurance, but the effect is smaller for lower educated workers. Lower educated workers have higher welfare gain than postgraduates, which supports the argument for a lower UI replacement rate for postgraduates

Presented by

Ran Gu (Department of Economics)

Date & time

20 Feb 2019, 12:30


2N2.5B.24 - ISER Boardroom [Note change from usual venue]

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