Essays in macro and labor economics

Abstract

This dissertation includes two chapters. The first chapter studies the labor market effect of the college expansion policy in China. In 1999, the Chinese government embarked on a program to increase the entry class to tertiary education by 42% from the previous year; the college admission rate stayed at the higher level since then. The expansion of college education represents a large and exogenous increase in supply of the college graduates to the labor market. This paper identifies the key role of the relative college labor supply in driving the changes of college wage premium after the expansion program. Assuming imperfect substitutability of workers in different education and age groups, I propose an overlapping-generation model with endogenous educational choice to account for college premium trends in distinct demographic groups. The estimation results provide the basis for evaluating the welfare effects of the college expansion in different subgroups. In the second chapter, which is co-authored with Huo Zhen, we try to understand the excess consumption volatility in the emerging countries. In emerging markets, business cycles are characterized by higher consumption volatility relative to output and strongly counter-cyclical current accounts. Meanwhile, agents in emerging countries face higher uncertainty in forecasting economic fundamentals. We build a general equilibrium business cycle model with heterogeneous income profiles and imperfect information. Agents observe their income to learn the growth rate of their individual human capital and the growth rate of the aggregate economy. Due to information frictions, a shock to the growth rate of the aggregate economy will be partly attributed to the growth rate of agents' own human capital, the latter of which has more persistent effects on agents' life-time income. As a result, the economy features higher consumption volatility than the output. Quantitatively, we find that the model can successfully explain the excessive volatility of consumption and generate a strongly negative correlation between the trade balance and output for a wide range of TFP and income processes.