We study the distribution of labor income during large devaluations. Across coun- tries, inequality falls after large devaluations within the context of a surge in inflation and a fall and subsequent recovery of real labor income. To better understand inequality dynamics, we use a novel administrative dataset covering the 2002 Argentinean devaluation. We show that following a homogeneous fall in real labor income across workers, the bottom of the income distribution recovers faster than the top. Low labor mobility and lack of union coverage among high-income workers explain their slow recovery.
How does labor market heterogeneity affect the transmission of monetary policy? To answer this question, we develop a theory of non-Coasean labor markets with search frictions, idiosyncratic and aggregate shocks, sticky wages, and two-sided lack of commitment. We formulate the strategic interaction between workers and firms as a nonzero-sum stochastic differential game with stopping times and characterize its equilibrium. We show how to use microdata on wage changes and job transitions to identify the economy’s unobserved latent state, namely the distribution of wage-to- productivity ratios. Based on this distribution, we provide sufficient statistics for the aggregate response of employment and real wages to monetary shocks.