I study the macroeconomic implications of college major choices in the context of a frictional labor market framework. I develop an equilibrium search model with two-sided multidimensional heterogeneity in the labor market and endogenous college and major decisions. In the model, individuals are initially sorted into college majors based on their multidimensional abilities (math, verbal, and social) and preferences, which leads to differential human capital accumulation by major across these dimensions. Firms are heterogeneous in their job requirements and create jobs endogenously. I calibrate the model using data from the NLSY79 and O*NET. I use the model to evaluate the role of college subsidies in mitigating inefficiencies arising from labor market frictions. The expenditure-neutral, welfare-maximizing subsidy scheme—which allows for differential subsidies across majors while maintaining fixed total subsidy costs—leads to a 0.5% increase in overall welfare. This policy also results in a 35% increase in the number of Science and Engineering graduates. General equilibrium effects are significant, with about one-third of output gains in the welfare-maximizing economy driven by improved job creation and reduced worker-job mismatch. These findings stand in contrast with the current practice, where higher education subsidies are largely distributed without differentiating by college major.

Using establishment-level World Bank Enterprise Surveys, I document the following trends (i) the average tax noncompliance rate, defined as the ratio of unreported sales to total sales, decreases with GDP per worker, (ii) the tax noncompliance rate is size-dependent, i.e., small establishments conceal a higher fraction of their sales than large establishments, (iii) the level of this size-dependency diminishes as GDP per worker increases. To examine the implications of these findings for managerial quality and aggregate output, I develop a modified version of Lucas(1978) span-of-control model in which managers invest in their managerial skills and choose how much of their income to report to the government after considering the risk of getting inspected by tax officials. The results reveal that incomplete tax enforcement significantly diminishes economy-wide managerial quality, with the magnitude of this impact escalating with the level of size-dependency in tax noncompliance. For instance, transitioning from the benchmark economy, calibrated to U.S. data, to an economy similar to Brazil’s tax enforcement regime leads to an approximate 23% reduction in average managerial quality and roughly a 3% decrease in output.

This paper documents the life cycle of formal and informal plants using five waves of the Mexican establishment census. Formal plants begin operations with three times more workers than informal plants and demonstrate faster growth rates. Throughout their life cycle, formal establishments more than double their size, while informal plants increase their size by only 77%. A general equilibrium model is developed to quantify the aggregate economic losses stemming from these growth rate disparities. In the model, plants grow through productivity investments, and informality emerges from incomplete enforcement. In equilibrium, informal plants exhibit flatter life cycle profiles to avoid detection and taxation. Model parameters are calibrated to match key properties of plant size distribution and the life cycle of plants in Mexico. Quantitative results indicate that a revenue-neutral full enforcement increases aggregate output and the overall growth rate by sixteen and twenty-five percent relative to the benchmark, respectively.

We examine the interaction between unemployment benefits and subsistence self-employment in developing countries, where limited opportunities in formal labor markets push low-productivity individuals into self-employment. We develop a model that incorporates occupational choices, search frictions, and borrowing constraints, allowing individuals to choose between wage work, own-account work, and entrepreneurship. Our model highlights how low-wealth, low-ability individuals select into own-account work due to their inability to sustain the search for wage employment in a frictional labor market. Calibrating the model to Mexico, we explore the effects of introducing U.S.-style unemployment benefits. Our results indicate that if own-account workers can conceal their employment status, unemployment benefits lead to an excessive increase in own-account work and a reduction in aggregate output. However, when employment status is effectively monitored, unemployment benefits can reduce subsistence self-employment by 15 percentage points and generate significant output gains of nearly 2%.