Outside Options in the Labor Market


Danieli, O. (J.M.P.) & Caldwell, S., Working Paper. Outside Options in the Labor Market.
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This paper develops a method to estimate the outside employment opportunities available to each worker, and to assess the impact of these outside options on wage inequality. We outline a matching model with two-sided heterogeneity, from which we derive a sufficient statistic, the “outside options index” (OOI), that relates outside options to wages. This OOI uses the cross-sectional concentration of similar workers across job types to quantify the availability of outside options as a function of workers' commuting or moving costs, preferences, and skills. We use administrative data from Germany to estimate the OOI for every worker in a representative sample of the German workforce. We estimate the elasticity between the OOI and wages using two sources of quasi-random variation: the introduction of high-speed commuter rail stations, and a shift-share (“Bartik”) instrument. Using this elasticity and the observed distribution of options, we find that differences in options explain 30% of the gender wage gap, 88% of the citizen-non-citizen wage gap, and 25% of the premium for higher education. Differences in options between genders and education groups are driven mostly by differences in commuting costs.

Last updated on 10/16/2018