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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.

Suggested Citation

  • Helen Connolly & Peter Gottschalk, 2008. "Wage Cuts as Investment in Future Wage Growth," LABOUR, CEIS, vol. 22(1), pages 1-22, March.
  • Handle: RePEc:bla:labour:v:22:y:2008:i:1:p:1-22
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9914.2007.00404.x
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    References listed on IDEAS

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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. Bassanini, Andrea & Marianna, Pascal, 2009. "Looking Inside the Perpetual-Motion Machine: Job and Worker Flows in OECD Countries," IZA Discussion Papers 4452, Institute for the Study of Labor (IZA).
    3. Eric Smith & Carlos Carrillo Tudela, 2007. "Wage Dispersion and Wage Dynamics Within and Across Firms," 2007 Meeting Papers 615, Society for Economic Dynamics.
    4. Carlos Carrillo-Tudela & Eric Smith, 2017. "Search Capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 191-211, January.
    5. Gielen, Anne C. & Tatsiramos, Konstantinos, 2012. "Quit behavior and the role of job protection," Labour Economics, Elsevier, vol. 19(4), pages 624-632.
    6. 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.

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