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In this PhD thesis we are investigating topics on international migration and we focus in the case of the UK as a host country. We analyse the implications of restricted and unrestricted migration on the labour market outcomes and the welfare use of the migrants. In the first chapter we estimate the joint decision over the labour market behavior of an individual and her subsequent welfare use, and attempt to explain how this decision is differentiated between natives and immigrants. We incorporate differences in the purchasing power parities of the home countries and the host country to explain how these differences create different incentives between natives and immigrants. In the second chapter we investigate the effects of the economic crisis on the labour market performance of natives and immigrants in the UK. We assess the unemployment durations of EU and non-EU immigrants, and UK natives for the years before and during the economic crisis of 2008. We find that the unemployment duration of the EU immigrants converged to that of the UK natives, while the non-EU immigrants were the ones affected the most. We also find that the high degree of clustering into specific socioeconomic statuses, drove at a significant degree the unemployment duration out-comes for the EU immigrants. In the third chapter we investigate the job separation rates of immigrants and natives for the periods before and during the economic crisis of 2008. We find that the non-EU immigrants had higher separation rates than the natives and that this gap widened even further for the years during the crisis. The A8 immigrants had higher separation rates than the natives mainly due to early attrition from the survey. Exits towards unemployment or underemployment happened at a lower rate for this immigrant group compared to the natives. The two results combined indicate the importance of out-migration when the labour market outcomes of EU migrants are compared to those of the UK natives.

This thesis is a collection of essays on the important problems in developing countries and aims to contribute to the empirical literature on the i) financial services sector expansion and its implications on formal employment, i) impact of early retirement incentives on labour force participation rates and finally on the iii) effectiveness of stabilization funds on reducing the boom and bust cycles in light of fluctuating international commodity prices. Chapter 1 investigates the role of financial services expansion, especially the impact of increase in consumer credits on the reduction of informal employment. I argue that liberalization should naturally lead to a decline in the share of informal employment due to the fact that international firms are less likely to employ informally and consumers whose borrowing constraints are relaxed due to more credit availability are more likely to prefer goods that are paid with consumer credits. I test this hypothesis by exploiting the regional variation in Turkey. Due to the possible endogeneity problem, I employ several instruments and find positive impact of consumer services expansion on formal employment. Two unique datasets that I explore for for possible instruments are i) the religiosity and political tendencies surveys of 2011 and 2013, and ii) regional Armenian population loss data between 1914-1917 in the former Ottoman Empire that preceded the Turkish Republic. The exogenous variation that I seek to explore accordingly are; i) Islam bans all sorts of interest charges in financial transactions and therefore residents of more conservative regions are on average less likely to demand consumer credits, and ii) Armenians were the trading and artisan class of the Empire and therefore the main users of the financial instruments and when they perished. Chapter 2 is about the impact of a Social Security System that allowed women and men to retire as early as 38 and 44 years old on labour supply decisions in Turkey. Before the pension reform of 1999, the Law 3774, dated 1992 brought incentives to those individuals who several conditions to retire at a much earlier age than the conventional 60-65 years window. Using the Statistics on Income and Living Condition (SILC) panel dataset between 2007-2010 in a Fuzzy Regression Continuity Design, we find that these incentives let to an average decline of about 16.9 hours in weekly hours worked by men aged 44-52 and 20.6 hours decline in weekly hours worked by women who are aged between 39-49 in a bandwidth of three years around the eligible age for retirement. Moreover, we find that the entitlement for retirement after 44 years old reduced the probability of labour force participation of men by about 28% to 37% while we did not find a statistically meaningful impact on the participation decisions of women. Chapter 3 explores whether sovereign wealth or stabilization funds created by governments in oil rich countries are effective in reducing volatility and ensuring a counter-cyclical or acyclical fiscal policy in line with the optimal fiscal policy literature or whether they are just another government account in practise. The existing literature on the effectiveness of stabilization funds suffers from endogeneity problems, namely i) the endogeneity between gdp and government expenditures and ii) the endogenity of the decision to establish stabilization funds. In this paper, I contribute to the literature by addressing both of these problems by using a series of Two Stage Least Square Estimations and find positive evidence in favour of stabilization funds in reducing volatility and pro-cyclicality of the fiscal policy in oil rich countries. The findings are relevant for the wider discussion of the procyclicality in developing countries, as one third of the countries which are documented to improve fiscal policy cyclicality seem to be the ones that are resource rich and have a stabilization fund in place.

The first chapter discusses the effects of uncertainty shocks on the labour market. Using US data, I show empirically that increases in unemployment are due to both an increase in the separation rate and a decrease in the job-finding rate. By contrast, standard search and matching models predict an increase in the job finding rate in response to an increase in the crosssectional dispersion of firms’ productivity levels. To explain observed responses in labour market transition rates, I develop a search and matching model in which heterogeneous firms face a decreasing returns to scale technology, firms can hire multiple workers, and job flows do not necessarily coincide with worker flows. Costly job creation is key to obtaining a decrease in the job-finding rate after an increase in uncertainty. Standard numerical solution techniques cannot be used to obtain an accurate solution efficiently and I propose an alternative algorithm to overcome this problem. The second chapter studies business cycles when markets are incomplete, nominal wages do not respond one-for-one to price level changes, and labour markets are characterized by matching frictions. During recessions, idiosyncratic labour income risk increases as workers worry about being unemployed. This induces workers to save more. We allow such precautionary savings – in principle – to end up in both an unproductive asset (money) and a productive assets (firm ownership). The increased demand for money puts deflationary pressure on prices. If nominal wages are not sufficiently responsive to deflationary pressures, wage costs and the unemployment rate are pushed up, which in turn intensifies the fear of becoming unemployed. Unemployment benefits improve welfare in our economy. The third chapter analyses the inefficiencies created in a search and matching model that allows for on-the-job search. First, the Hosios rule for the efficient level of the worker’s bargaining power is adapted in a simple model. As the average gain of a new match is lower when some job seekers already have a job, the efficient level of labour market tightness should be lower and the worker’s bargaining power higher than in a model devoid of on-the-job search. Second, the decision of when to perform on-the-job search is endogenised. Too much on-the-job search is taking place, because workers do not fully incorporate their current firms’ loss when they quit. Partial wage commitment improves the efficiency of the on-the-job search decision and the efficient level can be obtained.

My thesis studies aspects related to international trade, labour markets and productivity. The first chapter analyses how countries adjust to the rise of China considering that labour markets are imperfect. I provide a theoretical framework to structurally quantify the impact of trade shocks and I find that China’s integration generates overall gains worldwide. However, in low-tech manufacturing industries in the UK and in the US, which face severe import competition from China, workers’ real wages fall and unemployment rises. The second chapter studies the recent boom in commodities-for-manufactures trade between China and other developing countries. Brazilian census data show that local labour markets more affected by Chinese import competition experienced slower growth in manufacturing wages and in-migration rates between 2000 and 2010. However, locations benefiting from rising Chinese demand experienced higher wage growth and positive effects on job quality. The third chapter suggests a possible explanation for poor productivity after the “Great Recession” in the UK: Low growth in the effective capital-labour ratio. This is likely to have occurred because there has been a fall in real wages and increases in the cost of capital due to the financial crisis. After accounting for (simulated) changes in the capital-labour ratio, the evolution of total factor productivity appears much more similar to earlier severe recessions and possibly related to underutilised resources. The last chapter shows that there is almost no “net decoupling” (the difference in growth of GDP per hour and average compensation, both deflated by the GDP deflator) over the past 40 years in the UK, although there is evidence of “gross decoupling” (the difference in growth of GDP per hour deflated by the GDP deflator and median wages deflated by a measure of consumer price inflation) in the US and, to a lesser extent, in the UK.

In this Ph.D. thesis, I study the role of inactive workers (i.e., individuals classified by standard statistical measures in the labour market as non-participants or as out-of-labour force) in the context of a frictional labour market model.

This thesis contains three essays on the role of tasks and technology in explaining the trends in reallocation of employment across occupations and sectors, and inequalities in the labor market. The first two chapters focus on the task content of occupations with special emphasis on the effect of interpersonal interactions in the changing structure of employment in the labor market. Chapter 1 studies structural change of employment at the task level. Interactions with customers are a key friction against the implementation of potentially better production styles and technologies, since customers are hard to train and should be satisfied according to their tastes. Using a wide range of data sources on tasks, detailed occupation employment, labor productivity, and computer adoption, Chapter 1 develops a novel task measure, interpersonal-service task intensity, to study the growing importance of service activity in the US labor market in recent decades and explores its linkages with technical change. The chapter explains the empirical findings with a model of structural change at the task level which suggests two distinct roles for interpersonal-service intensity and task-routinizability. Concerned with the reallocation of employment jointly across occupations and sectors, Chapter 2 quantifies the impact of interpersonal-service task intensity and routinization on job polarization and structural change of sector employment. I estimate a task-biased technical change model which is capable to address occupation-specific and sector-specific technical change separately and show that substantial portion of occupational and sectoral employment reallocation between 1987 and 2014 in the US can be explained by the two task aspects. While both types of tasks are significant drivers of job polarization, interpersonal-service tasks stand out in explaining the growth of service sector employment. Using the framework I also suggest answers to several issues in the related literature. Chapter 3 switches the focus of study from the task content to skills while keeping the occupation-based perspective. The last chapter studies the importance of within-occupation heterogeneity of skills in understanding the rising labor market inequalities. I document that employment and wage growth of occupations tend to increase monotonically with various measures of skill intensity since 1980 in the US, in contrast to the existing interpretation of labor market polarization along occupational wages. I establish robustness of the documented fact, explore the sources of the seemingly contrasting finding and argue that labor market polarization cannot be interpreted as polarization of skills that are comparable across occupations. The chapter reconciles the documented facts in an extended version of the canonical skill-biased technical change model which incorporates many occupations and within-occupation heterogeneity of skill types.