Essays on Heterogeneity in Macroeconomics and Labor Markets

This thesis is composed of three independent chapters. The first project studies how wealth can determine employment risk over the business cycle through labor market sorting. I find that workers with low liquid wealth face higher employment risk and propose a theory of wealth-sorting into risky jobs to rationalize it. I then integrate wealth-sorting in a quantitative model with aggregate risk to study its implications for wages and job transitions over the business cycle, as well as its consequence for long-term inequality. Key findings are that recessions depresses labor market outcomes relatively more for the poor; and that the interaction between employment risk and wealth accumulation generates a “poverty trap”. The second project empirically uncovers a novel transmission mechanism of monetary policy to individual labor income, working through the employers. Using matched employer- employee data from Germany, we show that firms differ in the degree of income insurance they provide to their workers. Our main finding is that wages of workers in large firms are relatively more sensitive to monetary policy shocks. This is particularly true for above- median workers and cannot be fully explained by a worker component or sorting. Moreover, monetary policy shocks exacerbate labor income inequality. The effect is relatively stronger in easings, driven by a large increase in wages for top earners. The third project studies how monetary policy shapes the aggregate and distributional effects of an imported energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model that matches salient features of the Euro Area data. We find that energy price shocks always reduce aggregate consumption, and households with little wealth are more adversely affected. Policy responses inducing strong increases in interest rates in response to inflation amplify the negative aggregate outcomes in the short-term, but lead to a faster recovery. However, low-wealth households are further adversely affected.