The two chapters of this dissertation explore two central topics of the current policy debate.The first chapter studies the increase in markups experienced in the US starting from the 1980s. I document new facts on the evolution of markups by cohorts of firms, and I provide evidence that these patterns are linked to knowledge creation and knowledge diffusion. This chapter investigates, through the lens of a structural model, how the size of the technological gap and the speed of catching up with the frontier affect welfare. The quantitative results suggest that knowledge diffuses 38% faster in 2010 than in 1980, and the household experiences a consumption-equivalent welfare gain of 0.29% in an economy in which the quality of innovation and the intensity of knowledge diffusion is set at the 2010 values rather than the 1980 values.The second chapter investigates the impact of extensions in unemployment benefits duration on labor market sorting. The findings provide support for the hypothesis that unemployment insurance benefits increase wages by improving the employee-employer matches. The results also show bigger effects of unemployment insurance benefits extensions on match quality for those more likely to be liquidity constrained such as women, non-whites, and less-educated workers.

This dissertation explores the business cycle dynamics of the aggregate labor market. In two essays I advance the theoretical modelling of these markets and examine whether the new theory does quantitatively better at accounting for empirical evidence than existing models. Both essays examine models where market incompleteness faced by workers implies that long term wage contracts play a role in providing consumption smoothing to workers. The terms of these state contingent contracts depend on: (1) the preferences of the contracting parties, (2) whether parties can commit to contracts. The essays embed such optimal dynamic contracting problems into a Mortensen-Pissarides style model of labor market flows with aggregate shocks, contributing to the theoretical modelling of wage determination in this model framework. I find that market incompleteness has quantitatively only limited ability to explain the volatility puzzle facing existing models: unemployment varies strongly over the business cycle, while labor productivity varies much less. Whether the models are consistent with wage data hinges both on the preferences of contracting parties: entrepreneurs versus workers, as well as constraints on contracting.

Prominent economists discuss internal labor markets, the dynamics of immigration, labor market regulation, and other key topics in the work of Michael J. Piore. In Economy in Society, five prominent social scientists honor Michael J. Piore in original essays that explore key topics in Piore's work and make significant independent contributions in their own right. Piore is distinctive for his original research that explores the interaction of social, political, and economic considerations in the labor market and in the economic development of nations and regions. The essays in this volume reflect this rigorous interdisciplinary approach to important social and economic questions. M. Diane Burton's essay extends our understanding of internal labor markets by considering the influence of surrounding firms; Natasha Iskander builds on Piore's theory of immigration with a study of Mexican construction workers in two cities; Suzanne Berger highlights insights from Piore's work on technology and industrial development; Andrew Schrank takes up the theme of regulatory discretion; and Charles Sabel discusses theories of public bureaucracy.