The Racial Penalty in Job Ladder Transitions

We study the role of job transitions and firm pay policies in the Black-White earnings gap in the US. We use administrative data for the universe of employer-employee matches from 2005-2019 to analyze worker mobility in a general but tractable framework, which allows for firm effects that depend on workers’ job history. Using differences in average pay between origin and destination firms as the treatment intensity of a job move, we analyze transitions up and down the job ladder and estimate race-specific passthrough rates of average firm pay into a mover’s own earnings. First, we find race-specific asymmetry around the direction of the move, whereby losses experienced in downward transitions are meaningfully larger than gains from upward transitions with a similar treatment intensity. For a $1 earnings increase in transitions up the job ladder, earnings passthroughs in transitions down the job ladder impose an earnings loss of $1.25 among White workers and $1.50 among Black workers. Second, we uncover career setbacks as a novel pathway in the evolution of racial earnings gaps. In transitions down the job ladder, Black workers lose an additional $0.24 for every $1 decrease in White workers’ earnings, a finding which prevails across sex and age. This “racial penalty” is not driven by differential pay, as it is completely absent when Black and White workers move between the same firm pairs. Instead, the penalty is due to differential sorting following career setbacks, so that Black workers regain employment in “worse” jobs, with strong evidence for racial differences in access to short-run liquidity as a mechanism. Overall, our findings offer a robust and computationally simple framework for modeling earnings determination processes and have implications for safety-net policies in the American labor market.