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Wage Cuts as Investment in Future Wage Growth: Some Evidence

Author

Listed:
  • Helen Connolly

    (Northeastern University)

  • Peter Gottschalk

    (Boston College)

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 o§er consists of both a starting wage and expected future wage growth. We use our analytical model to estimate the distribution of job o§ers of less-educated workers. Roughly one-third of wage cuts experienced by these workers are transitions to jobs that have a higher value function than the existing job.

Suggested Citation

  • Helen Connolly & Peter Gottschalk, 2002. "Wage Cuts as Investment in Future Wage Growth: Some Evidence," Boston College Working Papers in Economics 543, Boston College Department of Economics, revised 30 Sep 2004.
    • Handle: RePEc:boc:bocoec:543
    Note: Paper previously circulated under the title "Job Search With Heterogeneous Wage Growth--Transitions To "Better" And "Worse" Jobs"
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    File URL: http://fmwww.bc.edu/EC-P/wp543.pdf
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    References listed on IDEAS

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    1. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, October.
    2. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
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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. Eric Smith & Carlos Carrillo Tudela, 2007. "Wage Dispersion and Wage Dynamics Within and Across Firms," 2007 Meeting Papers 615, Society for Economic Dynamics.
    3. 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.

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    More about this item

    Keywords

    wage dynamics; wage growth; job choice;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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