Essays in applied microeconomics

John W Lopresti, Purdue University

Abstract

This dissertation consists of three essays. The first essay examines the manner in which firms adjust product portfolios when exposed to trade. The second examines the wage growth effects of changes in minimum wage laws. The final essay analyzes changes in dropout rates in communities exposed to import competition from China The first essay examines how firms adjust product offerings in the face of changing trade costs. A recent theoretical literature has emphasized the magnitude and importance of multiproduct firms in trade. However, models within this literature have reached contradictory conclusions regarding the within-firm product diversification response to changes in trade costs. This paper attempts to resolve these contradictions by employing Bayesian techniques to estimate diversification responses, and the manner in which they differ across firms depending upon sales and export orientation. I analyze the adjustment of diversification levels of public US manufacturing firms in the period immediately preceding and following the Canada-US free trade agreement of 1989. I find evidence of a differential response among firms that are heterogeneous in terms of export orientation. Firms with less than 16 percent of sales in international segments reduce diversification following a reduction in trade costs, while more export-oriented firms increase diversification. Bayesian model comparison supports this finding. The data does not support a differential response when heterogeneity in firm sales is considered. The second essay, written jointly with Kevin Mumford, addresses the question of how a minimum wage increase affects the wages of low-wage workers. Most studies assume that there is a simple mechanical increase in the wage for workers earning a wage between the old and the new minimum wage with some studies allowing for spillovers to workers with wages just above this range. Rather than assume that the wages of these workers would have remained constant, this paper estimates how a minimum wage increase impacts a low-wage workers' wage relative to the wage the worker would have if there had been no minimum wage increase. The method allows for the effect to depend not only on the initial wage of the worker, but also nonlinearly on the size of the minimum wage increase. Using Current Population Survey data from 2005 to 2008, a period with a large number of state-level minimum wage increases, this paper finds that low-wage workers are hurt by a small minimum wage increase. Larger minimum wage increases benefit not only those workers directly affected but spill over to workers with moderately higher wages. Finally, this paper finds evidence for heterogeneity in the effect by age, gender, income, and race. The final essay, written jointly with Andrew Greenland, exploits regional variation in exposure to Chinese import competition to identify the effect of trade-induced changes in labor market conditions on U.S. high school dropout rates. Employing the methodology of Autor et al. (2013), who examine the effect of increased Chinese import competition on U.S. employment and wages, we argue that increasing import competition increases the relative returns to education and leads to a reduction in dropout rates. For the region with the median dropout rate in 2000, a movement from the 25th to the 75th percentile of change in import exposure per worker corresponds to a reduction in the 2007 dropout rate by .456 percentage points, which corresponds to a reduction in the number of dropouts by over 68,000 annually. Using available estimates of the present value of the lifetime net public benefit of each additional high school graduate and extrapolating such an annual reduction in dropouts to the entire country implies a net public benefit between $4.4 billion and $14.4 billion. Results are robust to controls for changes in school quality, demographic composition, and initial labor market conditions.

Degree

Ph.D.

Advisors

Tobias, Purdue University.

Subject Area

Economic theory

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