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On-the-job Search, Productivity Shocks, and the Individual Earnings Process

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Author Info
Fabien Postel-Vinay
Hélène Turon ()

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Abstract

Individual labor earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes. Specifically, we show within an otherwise standard job search model how the combined assumptions of on-the-job search and wage renegotiation by mutual consent act as a quantitatively plausible “internal propagation mechanism” of i.i.d. productivity shocks into persistent wage shocks. The model suggests that wage dynamics should be thought of as the outcome of a specific acceptance/rejection scheme of i.i.d. productivity shocks. This offers an alternative to the conventional linear ARMA-type approach to modelling earnings dynamics. Structural estimation of our model on a 12-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure which is remarkably consistent with the data.

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Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 06/141.

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Length: 32 pages
Date of creation: Feb 2006
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Handle: RePEc:bri:cmpowp:06/141

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Related research
Keywords: Job Search Individual Shocks Structural Estimation Covariance Structure of Earnings

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Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Julien Prat, 2007. "The Rate of Learning-by-Doing: Estimates from a Search-Matching Model," IZA Discussion Papers 2780, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Jérôme Adda & Christian Dustmann & Costas Meghir & Jean-Marc Robin, 2006. "Career Progression and Formal versus On-the-Job Training," IZA Discussion Papers 2260, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. MAGNAC, Thierry & ROUX, Sébastien, 2007. "Dynamique des salaires dans une cohorte," IDEI Working Papers 436, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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