History dependence in wages and cyclical selection: Evidence from Germany

Using administrative employer-employee data from Germany, we investigate the behavior of individual wages over the business cycle. We present evidence that both contractual wage arrangements and cyclical match quality are a key feature of the German labor market. We show that parts of the excess wage cyclicality of new hires discussed by the literature can be explained by cyclical job ladder movements in match quality of new hires from employment. Guided by the literature of job reassignments, we additionally allow for variation in the match quality within an employer-employee match. Besides support for job-specific contracts, our novel main results show that much of the excess wage cyclicality of job changers can be explained by occupation switching workers.