Essays on Income Inequality: The Role of Institutions, Firms and Neighborhoods

Abstract

This dissertation consists of three empirical studies closely related to income inequality. The first study focuses on the minimum wage — an important labor market institution to address income inequality at the lower end of the wage distribution. I study the effect of a 15-19% increase in the Dutch age-specific minimum wage applicable to workers aged 20-22 on the employment outcomes and earnings of those affected age groups. I use a difference-in-differences research design to trace the impact of the minimum wage increase throughout the age-specific wage distribution. I show that the increase in the age-specific minimum wage raised the wages of workers aged 20-22 in low-paid jobs, without adversely affecting the number of jobs held and total hours worked by those workers. The second study focuses on firm wage-setting (i.e. monopsony) power, which allows firms to pay wages below the competitive market wage without losing a substantial share of their employees. This can have important consequences for income inequality if firms possess more wage-setting power over certain groups of workers or when certain groups of workers are disproportionately employed in industries or occupations characterized by a higher degree of firm wage-setting power. I quantify the degree of firm wage-setting power in the Dutch labor market by estimating labor supply elasticities to firms, using a matched event-study research design. In addition, I explore whether firm wage-setting power varies across industries and different groups of workers. I find that in the Dutch labor market as a whole, firms can potentially pay wages 12% below the competitive market wage. Moreover, I find that firms possess more wage-setting power over women compared to men, potentially contributing to the gender wage gap. Additionally, firms have relatively high wage-setting power over the lowest- and highest-paid workers. The third study focuses on the relationship between the characteristics of the neighborhood in which children grow up and their educational achievement — a key determinant of future labor market prospects. I exploit a Dutch refugee dispersal policy to estimate the causal effect of the neighborhood share of individuals with a shared ethnic background as the child (i.e. co-ethnic concentration) on the education outcomes of refugee children. I show that the effect of co-ethnic concentration is moderated by the average earnings of individuals with shared ethnic background as the child in the neighborhood (i.e. co-ethnic earnings). Growing up in a neighborhood with a higher co-ethnic concentration increases the probability that refugee- children obtain an academic track diploma in secondary school or enroll in higher education when co-ethnic earnings are relatively high. The opposite effect is found when co-ethnic earnings are relatively low.