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Wage Cuts as Investment in Future Wage Growth

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  • Helen Connolly
  • Peter Gottschalk

Abstract

Wage cuts are often presumed to reflect an adverse change in economic constraints. However, several theoretical models have shown they can be a form of investment in future wage growth. This paper provides empirical evidence of the latter by explicitly modeling the worker's job choice when the job offer consists of both a starting wage and expected future wage growth. We use our analytical model to estimate the distribution of job offers faced by workers who are searching across jobs differing in both initial wage and expected wage growth. For females, roughly one-third of job changes that result in immediate wage cuts are transitions to jobs that have a higher value function than the existing job. For males, the corresponding value is one-fifth. Copyright 2008 The Authors.

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Bibliographic Info

Article provided by CEIS in its journal LABOUR.

Volume (Year): 22 (2008)
Issue (Month): 1 (03)
Pages: 1-22

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Handle: RePEc:bla:labour:v:22:y:2008:i:1:p:1-22

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Cited by:
  1. John Martin & Stefano Scarpetta, 2012. "Setting It Right: Employment Protection, Labour Reallocation and Productivity," De Economist, Springer, vol. 160(2), pages 89-116, June.
  2. Carrillo-Tudela, Carlos & Smith, Eric, 2012. "Search Capital," IZA Discussion Papers 6366, Institute for the Study of Labor (IZA).
  3. Chao Fu, 2011. "Training, Search and Wage Dispersion," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 650-666, October.
  4. Gielen, Anne C. & Tatsiramos, Konstantinos, 2012. "Quit Behavior and the Role of Job Protection," IZA Discussion Papers 6540, Institute for the Study of Labor (IZA).
  5. Carlos Carrillo-Tudela & Eric Smith, 2009. "Wage dispersion and wage dynamics within and across firms," Working Paper 2009-22, Federal Reserve Bank of Atlanta.

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