Gu, Ran; (2018) Asymmetric Information, Durables, the Business Cycle and the Labour Market. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis studies how workers are partially insured against business cycle shocks in an imperfect labour market. Business cycle shocks have large effects on the stability of worker’s wage and employment. This study shows these shocks are partially insured by firms, using durable goods, and by social insurance policies. Chapter “Adaptation Costs, Asymmetric Information, and the Business Cycle Effects on the Postgraduate Wage Premium” studies how cyclical wage shocks are insured by long-term contracts provided by firms. I document a new fact that postgraduates have smaller wage shocks than bachelor graduates over the business cycle. I argue the reason for this phenomenon is the adaptation costs, which reduce the value of worker’s outside options and lead workers and firms to agree on a contract with smoother wages. I provide empirical evidence that postgraduates have higher adaptation costs. So postgraduates are better insured by firms and have smaller cyclical wage shocks. Chapter “Asymmetric Information, Durables, and Earnings Shocks” addresses the question of how workers insure themselves against earnings shocks using durable goods. Asymmetric information about the quality of used cars works like a transaction cost, and it implies that used cars are a poor savings vehicle. Chapter “The Impact of Unemployment Insurance on the Cyclicality of Labour Force Participation” studies how business cycle affects worker’s decision on labour force participation, and it shows the level of unemployment insurance benefit plays an important role in shaping fluctuations in the participation rate.

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