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Wage Dynamics and Labor Market Transitions: A Reassessment through Total Income and “Usual” Wages

We present a simple on-the-job search model in which workers can receive shocks to their employer-specific productivity match. Because the firm-specific match can vary, wages may increase or decrease over time at each employer. Therefore, for some workers, job-to-job transitions are a way to escape job situations that worsened over time. The contribution of our paper relies on our novel approach to identifying the presence of the shock to the match specific productivity. The presence of two independent measures of workers’ compensation in our dataset of is crucial for our identification strategy. In the first measure, workers are asked about the usual wage they earn with a certain employer. In the second measure, workers are asked about their total amount of labor earnings during the previous year. While the first measure records the wages at a given point in time, the second measure records the sum of all wages within one year. We calibrate our model using both measures of workers’ compensation and data on employment transitions. The results show that 59% of the observed wage cuts following job-to-job transitions are due to deterioration of the firm-specific component of wages before workers switch employers.

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