This series of essays studies the observed fluctuations in the aggregate economy and the factors behind. I first examine the cyclical behaviors of the aggregate productivity shocks, as measured by the aggregate Solow residual and how it relates to the technology adoption decision done by individual firms. Then I divert my attention to the labor market, and enquire into (i) why workers with different skills show such significant differences as observed in the U.S. in terms of their unemployment rates and wages; and (ii) what the so-called labor wedge might reflect.

The first chapter of my dissertation formalizes Schumpeter's idea that the firm level technological changes are what cause changes in the aggregate Solow residual. The analysis starts with a characterization about how new firms make their technology adoption decision, taking into account both the average productivity of the candidate technology and the risk associated with its adoption. Then through the creative destruction process, these newly adopted technologies gradually prevail in the market, and eventually manifest themselves in the aggregate Solow residual. The quantitative experiments confirm that the Schumpeterian story told in this chapter is able to amplify the traditional aggregate productivity shock, as well as to transform other shocks to the economy into variations in the Solow residual, and thus generating significant business cycle fluctuations. The model also has a few reasonable firm-level implications.

The second chapter develops a framework for the study of the labor market dynamics when workers differ in their production efficiency, which I call skills in the chapter, and when there are search frictions. Compared to the standard business cycle model with frictional labor market, skill heterogeneity in my model creates dispersion in the match surpluses between the workers and the firms, and thus necessitates a screening process that results in the termination of the unprofitable matches in equilibrium. This endogenous separation mechanism disproportionately influences the employment status of the less-skilled workers and not only exposes them to larger layoff risks, but also inflicts on them greater difficulties in terms of reestablishing their employment relationship with the firms. Quantitatively, the model has cross-sectional implications for the unemployment rates and the wages that are consistent with the observed differences across skill groups in the U.S. labor market.

The last chapter carefully studies the hypothesis that the empirical labor wedge as defined by Robert Shimer may reflect the existence of a household production sector that is largely uncounted by the standard macroeconomic framework. By enriching an otherwise standard real business cycle model with a household production sector, I find that if the hours worked at home and the utility obtained from the home-produced goods are not included in the calculation, the model generates a wedge between the marginal product of labor (MPL) and the household's marginal rate of substitution between consumption and leisure (MRS) that assembles the empirical labor wedge. With reasonable parameter values, the quantitative properties of the model-predicted labor wedge also match those of their empirical counterpart.

This dissertation studies the interaction between private consumption smoothing mechanisms and labor markets. Chapter 1 studies the growth in credit card access among the unemployed over the last 40 years and how this credit growth has impacted labor markets. I begin by developing a general equilibrium business cycle model with search in both the labor market and in the credit market. Calibrating to the observed path of credit between 1974 and 2012, I find that growth in credit card access can lead to deeper and longer recessions as well as moderately slower recoveries. Chapter 2, which is co-authored with Lee E. Ohanian, looks at the impact of foreclosure protection on unemployment during the 2007-2009 financial crisis. Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of ``informal'' unemployment insurance during the 2007 recession and the subsequent recovery. In a dynamic model, we capture this behavior by treating both delinquency and foreclosure not as one period events, but rather as protracted and potentially reversible episodes that influence job search behavior and wage acceptance decisions. After calibrating, we find that the observed foreclosure delays increase the unemployment rate by an additional 1/3%-3/4%. And finally, Chapter 3, which is co-authored with Lee E. Ohanian, Kris Gerardi, and Paul Willen, looks at the empirical determinants of default and provides a new suggestive measure of strategic default. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month's mortgage payment. This suggests that ``ruthless,'' or ``strategic'' default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.

This dissertation consists of three chapters. Chapter 1 presents new empirical evidence and a theoretical framework, which suggests that firing costs impede human capital accumulation within firms. To that end, I investigate the impact of a German reform in 2004 that removed firing costs exclusively for smaller establishments. Applying a difference-in-differences approach to administrative matched employee-employer data, I find that the targeted smaller establishments experienced an increase in the proportion of employees participating in training compared with others. To clarify the underlying mechanism and quantify the aggregate effect of the reform, I develop an on-the-job search model with human capital and firing costs. Reducing firing costs in this model stimulates job creation by firms, and thereby increases the probability of workers transitioning to firms in which their skills are more valuable. This encourages workers to accumulate human capital. The calibrated model suggests that the German reform could result in a 0.58% increase in aggregate productivity, with 0.49% attributed to human capital accumulation and the rest to more efficient resource allocation.

Chapter 2, which is co-authored with Yasutaka Koike-Mori and Koki Okumura, develops an endogenous growth model that incorporates on-the-job search and examines the allocation of inventors across firms, knowledge diffusion, and its impact on growth. In our model, inventors play dual roles: they engage in in-house R&D and transfer knowledge from previous employers to new ones when changing jobs. Using an administrative panel dataset on German inventors matched to their employing establishments and patents, we find that, relative to general workers, inventors are more likely to transition to less productive establishments and suffer a higher wage growth via the transition. We also find that the knowledge base of establishments measured by patents grows faster when a significant proportion of their inventors originate from establishments possessing a larger knowledge base. We then calibrate the model to reflect these empirical findings and examine the effects of innovation policy. While subsidies to frontier firms discourage knowledge diffusion from these firmsto technologically lagging firms, these subsidies also encourage innovation within frontier firms. The former negative effect dominates in the short term, but the latter positive effect dominates in the long run.

Chapter 3, which is co-authored with Tomohide Mineyama, estimates the user cost of labor (UCL) - an allocative labor cost measure used in analyzing economies with ongoing employment relationships—while controlling for cyclical changes in job-match quality, which has been identified as a potential problem in previous studies. We use a novel dataset that exploits school (nonemployment)-to-employment flows to control for this measurement problem. The estimated UCL remains highly procyclical after making this correction, with an estimated wage semi-elasticity of 2.69 with respect to a one percentage point change in the unemployment rate. The semi-elasticity is around twice as large as that of the new-hire wage. We also find that the corrected UCL cyclicality is asymmetric, with the UCL rising in booms but remaining flat in downturns. To account for this asymmetry, we develop a directed search model with asymmetric information in which firms use wages as a screening tool to receive applications from targeted workers. The model economy generates asymmetric labor market dynamics that are consistent with the data.

This dissertation studies how fiscal policy influences the macroeconomic variables in the long run under different economic environments and restrictions. Chapter 1 introduces a politico-economic model with a welfare state and immigration. In this model, policies on taxes and immigration are decided by the plurality voting system. While many studies on fiscal implications of immigration argue that relaxing immigration policies can substitute tax reforms in aging economies, I show that the democratic voting procedure can dampen the effect of relaxing immigration policies since desired policy reforms are not always implemented by the winning candidate of an election. This political economy results in social welfare losses through three different channels. Chapter 2 examines differences in hours worked between South Korea and Mexico during 1991-2008. Specifically, this paper assesses the extent to which this difference is explained by a neoclassical growth model with distortionary taxation of government. The model successfully captures the long-run trends of hours worked in Korea and Mexico. While gradual decline in hours worked of Korea is well explained by increasing tax wedges of the labor market, hours worked in Mexico exhibit a relatively at trend since Mexico's labor wedges do not change dramatically during the sample period. This shows that long-term fiscal policy was significant in Korea economy around the 1997 crisis, while government fiscal policy played only a modest role in Mexico's labor market during the Peso crisis. Finally, Chapter 3 examines the large differences in long-run changes in macroeconomic variables across 15 OECD countries. Specifically, this paper assesses the extent to which the neoclassical growth model equipped with government consumption, investment, and proportional taxes on expenditures and factor incomes explains the macroeconomic variables. According to the results, proportional taxes on income and expenditure plays a principal role in explanation of long-term trends in those variables. Changes in government investment influence the variables only modestly. This implies that it is not sizes of government expenditure, but distortions caused by tax wedges, that influence changes of macroeconomic variables in the long run.

In these essays, I examine (i) the empirical methods that are widely used in the literature to measure total factor productivity growth and (ii) the impact of nationalization on productivity in the oil industry. The first chapter, which is an ongoing work with SHI, Wei, investigates two empirical measures, quantity-based (primal) measure and price-based (dual) measure, of total factor productivity growth. My co-author and I analyze how these two measures are affected by output market imperfection or variable capacity utilization. We find that under constant-returns-to-scale production function assumption, existence of the imperfect competition in the output market creates a gap between the measured TFP growth and the true TFP growth, no matter which method is used. However, theoretically, it does not affect the equivalence between the two measures. Under variable capacity utilization, we show that constant-returns-to-scale assumption is almost enough to guarantee the validity of the two methods in correctly capturing the true TFP growth. In the second and third chapters, I analyze the link between nationalization and productivity. The second chapter documents the trends in expropriation acts, and evaluates the impact of expropriations on labor productivity of resource-rich developing countries in the oil industry. In the first part of this chapter, I investigate the trends in the expropriation acts that took place in 102 developing countries during the period 1922-2006. I find that more than half of the acts occurred between 1970 and 1976, there has been an increase in the number of expropriations in recent years, and the extractive sector including petroleum is more likely to be expropriated. Motivated by these facts, in the second part, I examine the oil industry in a period of widespread expropriations, the 1970s. In a sample of major oil-producing countries including OPEC and non-OPEC members, I show that losses in relative labor productivity after nationalization range from 25 percent to 55 percent. In the third chapter, I attempt to provide an answer for why nationalization is associated with lower productivity by examining the case of the 1975 Venezuelan oil industry nationalization. The first part of the chapter documents the facts. I find that prior to nationalization there was a significant contraction in manpower (particularly in the foreign work force) and exploration, and an increase in production and productivity. Production and productivity declined sharply, however, by the beginning of the nationalization process. This decline continued even after the process was finalized and a substantial expansion took place in the industry. In the second part, I explain these facts by using a dynamic partial equilibrium framework for nonrenewable resources featured by imperfect substitutability between domestic and foreign workers. The anticipation of nationalization preceding 1970 can explain the drop in the total work force at the expense of lower exploration which accompanies increasing productivity. The lost foreign expertise can explain the path of productivity during and after nationalization. A comparison of the simulated and actual time series shows that around 56 percent of the increase in productivity prior to 1970, and about 39 percent of the decline in productivity during and after the nationalization process can be attributed to the proposed mechanism.

In these essays, I examine (i) the role of terms of trade in emerging countries and (ii) economic efficiency under endogenous information. The first chapter documents a negative relationship between the terms of trade - defined as the ratio of imports to the price of exports - and various macroeconomic variables such as output, consumption, investment and total factor productivity (TFP) in emerging economies. The second part of this chapter presents a small open economy business cycles model featuring intermediate imported inputs, monopolistic competition and input-output linkages. A calibrated version of the model reproduces the empirical facts documented in the first part. In particular, the model replicates the negative link between the terms of trade and TFP, providing an explanation to a long-standing puzzle in the business cycle literature. In addition, I show how terms of trade shocks help to increase the volatility of consumption above the volatility of output. The second and third chapters, which are part of an ongoing work with Venky Venkateswaran, examine economic efficiency under costly private information. In the second chapter, my co-author and I study the efficiency of equilibrium outcomes in models where monopolistically competitive firms acquire costly information about aggregate fundamentals before making pricing or quantity decisions. Using this framework we show that market power reduces the private value of information relative to its social value, causing too little investment in learning and inefficient cyclical fluctuations. Importantly, this is true even in an environment where the ex-post response to information is socially optimal, which is the case when firms choose labor input under uncertainty about aggregate productivity. When firms set nominal prices, however, their actions exhibit a inefficiently high sensitivity to their private signals. The combination of this inefficiency in information use and market power makes the overall direction of the inefficiency in information acquisition ambiguous. In terms of policy, we show that the standard full information response to market power-related distortions can reduce welfare under endogenous uncertainty. We also show how our analysis applies to coordination games in general, using the beauty contest framework. In the third chapter my co-author and I show that the same inefficiencies characterized in the previous chapter take place in standard business cycle models. In a RBC framework with dispersed information about technology shocks, distortions due to market power have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. In a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information.

My dissertation contributes towards our understanding of the determinants of wage inequality and to the causes of the emergence of jobless recoveries. It consists of two chapters. The first, "Identifying Labor Market Sorting with Firm Dynamics" studies the determinants of wage inequality, which requires understanding how workers and firms match. I propose a novel strategy to identify the complementarities in production between unobserved worker and firm attributes, based on the idea that positive (negative) sorting implies that firms upgrade (downgrade) their workforce quality when they grow in size. I use German matched employer-employee data to estimate a search and matching model with worker-firm complementarities, job-to-job transitions, and firm dynamics. The relationship between changes in workforce quality and firm growth rates in the data informs the strength of complementarities in the model. Thus, this strategy bypasses the lack of identification inherent to environments with constant firm types. I find evidence of negative sorting and a significant dampening effect of worker-firm complementarities on wage inequality. Worker and firm heterogeneity, differential bargaining positions, and sorting contribute 71\%, 20\%, 32\% and -23\% to wage dispersion, respectively. Reallocating workers across firms to the first-best allocation without mismatch yields an output gain of less than one percent.\

My second chapter, "Does the Cyclicality of Employment Depend on Trends in the Participation Rate?" studies the fact that the past three recessions were characterized by sluggish recovery of the employment to population ratio. The reasons behind these ”jobless recoveries” are not well understood. Contrary to other post-WWII recessions, these ”jobless recoveries” occurred during times with downward trending labor force participation rate(LFPR). I extend the directed search setup of Menzio et al. (2012) with a labor force participation decision to study whether trends in LFPR cause jobless recessions. I then show that that recoveries during times of declining LFPR look very different to recoveries during positive LFPR trend. The basic intuition is as follows: During downward trending LFPR, many low productivity workers cling on to their jobs, but once separated, it does not pay off for them to pay the search cost to re-enter the market. If the recession happens during increasing trend LFPR, then the employment recovery is helped by persons entering the labor market. Thus, I highlight that contrary to the usual approach in the literature, it is important to explicitly account for the trend of the LFPR.