Children have a strong tendency to choose the same occupations as their parents, across all professions, earnings, and skill levels. We study the implications for intergenerational mobility and economic efficiency. Using individual-level data on the skills and personality traits of Swedish men, we estimate a general equilibrium Roy model incorporating unequal access to occupations depending on parental background. In a counterfactual economy with equal access, occupational following drops by half and earnings mobility increases by a third. Sons from low-income families gain the most, highlighting the misallocation of talent. Aggregate earnings gains are small in general equilibrium. Using an identification strategy that exploits long-run employment changes in fathers’ occupations, we estimate that occupational decline reduces sons’ tendency to follow, improves skill-match, and increases earnings, consistent with our structural-model estimates. Our results suggest that creating equal opportunities by removing occupational entry and exit barriers would increase intergenerational mobility without reducing output.
Revised and Resubmitted to American Economic Journal: Economic Policy
Labor income earned in Iceland in 1987 went untaxed. I use this episode to study labor supply responses to temporary wage changes. Using a population-wide dataset of earnings and working time and two identification strategies, I estimate intensive and extensive margin Frisch elasticities of 0.4 and 0.09, respectively. Workers with the ability to adjust drive these average responses: extensive margin by young and close-to-retirement cohorts and intensive margin responses by workers in temporally flexible jobs, though secondary jobs contribute to one-tenth of the response. The results suggest that adjustment frictions may similarly explain differences in elasticities within and across countries.
Men have fallen behind women in education in developed countries. Why? I study the impact of a transitory increase in the opportunity cost of schooling on men’s and women’s educational attainment. I exploit a reform in Iceland that lowered income taxes to zero for one year and compare teenagers above and below the compulsory schooling age. This earnings opportunity increased the dropout rate and led to a permanent loss in years of education for young men, but had no effect on the education of women. Male dropouts suffer substantial losses in lifetime earnings, slow career progression, and reduced marriage and fertility outcomes. The results cannot be explained by negative selection of dropouts or low returns to education but can be reconciled by gender differences in nonpecuniary costs of school attendance, myopia, or perceived returns to education. The findings suggest that due to these gender differences, economic booms misallocate young men away from school, entrenching the gender gap in education.
An emerging consensus is that the Frisch elasticity of labor supply is small. This may reflect a lack of salience, inelastic preferences, or prevalence of frictions. Studying survey data collected during a tax holiday in Norway, when earnings were untaxed during a transition between tax systems, I report three findings. First, 80 percent of adults were aware of the tax holiday. Second, one-fifth of adults responded by working more. Third, frictions in adjusting working hours or non-working time appear to be the reason for a majority of non-responses. The findings support the long-held notion that labor supply choices are constrained.
Review of Economic Studies, 2022. Vol. 89, Issue 3, p.1557-1592
We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. In our experiment, a third of the houses in a town were covered by lava. People living in these houses were much more likely to move away permanently. For the dependents in a household (children), our estimates suggest that being induced to move by the “lava shock” dramatically raised lifetime earnings and education. While large, these estimates come with a substantial amount of statistical uncertainty. The benefits of moving were very unequally distributed across generations: the household heads (parents) were made slightly worse off by the shock. These results suggest large barriers to moving for the children, which imply that labor does not flow to locations where it earns the highest returns. The large gains from moving for the young are surprising in light of the fact that the town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.
Economic Journal, 2021, Vol. 131, Issue 636, p. 1742-1771
We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.
Journal of Monetary Economics, 2016. Vol. 78, , Issue 2, p. 50-66
with Rannveig Sigurdardottir
Media coverage: Centralbanking.com
Administrative data on monthly wages in Iceland during 1998–2010 provide new insight into nominal wage rigidity. Unlike the data used in previous work, ours have a higher frequency, minimal measurement error, and a long sample including a period of substantial macroeconomic instability. We find that the monthly frequency of nominal wage changes is 13 percent. Although nominal wage cuts are rare, their frequency rises following a large macroeconomic shock. Timing of wage changes is both time-dependent and state-dependent: we find evidence of synchronization of adjustment and contracts of fixed duration, but also that inflation and unemployment over the wage spell affect the timing of adjustment.
Research in Progress
Real Wage Persistence and Job Displacement in Recessions
Do tight labor market conditions have persistent effect on real wages and, if so, are higher wages associated with higher risk of layoff in recessions? This paper provides new answers to these two important questions. Using employer-employee data on wages and employment in Iceland prior to and during the Great Recession, I find that labor market conditions at the beginning and during employment spells have persistent effects on real wages. Furthermore, I find that this downward real wage rigidity has allocative consequences for employment. Workers that were hired at times of favorable labor market conditions and thus have higher wages face significantly higher probability of job loss in recessions. These results indicate that higher entry-level wages reflect cyclicality and downward persistence of rents rather than differences in human capital accumulation or match quality.
Policy Papers and Working Papers Not Intended for Publication
QMM: A Quarterly Macroeconomic Model of the Icelandic Economy
Central Bank of Iceland, Working Paper No. 71, December 2015 (with Ásgeir Daníelsson, Bjarni G. Einarsson, Magnús F. Gudmundsson, Svava J. Haraldsdóttir, Thórarinn G. Pétursson, Signý Sigmundardóttir, and Rósa Sveinsdóttir).