Essays on Structural Change with Labour Market Frictions

This dissertation consists of three independent essays in the fields of labour economics and macroeconomics. The essays examine various aspects of labour reallocation across economic sectors.

The first essay examines how and why the cost of job loss varies with long-run industry employment growth. Detailed Finnish administrative data are used, and mass-layoff displacements are analysed using an event-study approach comparing displaced workers with matched controls. The results show that job loss has substantially more severe effects on re-employment prospects and post-displacement wages in declining industries than in expanding ones. A wage decomposition indicates that the main driver of larger wage losses is a reduction in establishment fixed effects. Additional contributions arise from adjustment costs associated with long tenure, as well as industry and occupation mobility. These findings contribute to a better understanding of labour reallocation costs arising from structural change.

The second essay shows, using Finnish administrative data, that while manufacturing employment declined and service-sector employment expanded, manufacturing workers generally have longer firm tenure, higher wages, and lower job mobility than workers in the growing service sector. These patterns are rationalised using a calibrated two-sector search-and-matching model. Calibrating the model to match observed differences in capital intensity generates a 2.1 percent manufacturing wage premium due to a hold-up problem. Structural change accounts for most of the observed 2.9-year tenure gap between manufacturing and service workers by reducing firm entry. These results help to explain why displaced workers in declining industries experience larger wage losses and longer unemployment spells despite high overall job stability.

The third essay studies outsourcing and the rise of business service industries, which have been key drivers of structural change in developed economies in recent decades. Using rich firm-level panel data from Finland covering 1994–2019, the essay examines how spending on business services is related to market uncertainty. The analysis shows that expenditures on business services increase with market uncertainty. In quantitative terms, firms with a one standard deviation higher turnover volatility allocate roughly 15 percent more on external services, a subset of business services involving subcontracted work. Panel analysis indicates that the pass-through of market uncertainty to employment volatility declines as business service intensity increases. Overall, these findings suggest that one function of business services is to cushion firms against market uncertainty in a labour market with frictions.

Contact Peter Elmgren

Email: peter.elmgren@helsinki.fi
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