Do Changes in Job Mobility Explain the Growth of Wage Inequality among. Men in the United States, ?

Transcription

1 Do Changes in Job Mobility Explain the Growth of Wage Inequality among Men in the United States, ? Ted Mouw Arne Kalleberg University of North Carolina, Chapel Hill November 11, 2008

2 Do Changes in Job Mobility Explain the Growth of Wage Inequality among Men in the United States, ? Abstract To what extent did the increase in wage inequality among men in the United States over the past three decades result from job loss and/or employment instability? While there have been numerous studies of job mobility and wage inequality, there is little systematic quantitative evidence as to how these are related. We address this question using data on men s wages and job mobility from the waves of the Panel Study of Income Dynamics (PSID). We propose a simple method for decomposing the change in wage inequality into components due to upward and downward employer mobility and within-employer wage changes. We find that downward employer mobility a proxy for involuntary mobility based on movement to a lower paid job with a new employer has the largest effect on inequality over a two-year period. Over a 6 year period, however, the effect of downward employer mobility is about 2.5 to 4 times smaller than the accumulated impact of workers who do not change employers. The findings suggests that explanations of rising inequality that focus solely on increases in employer mobility, instability, or job displacement are insufficient to account for the increase in wage inequality in the United States among men during this period.

3 Do Changes in Job Mobility Explain the Growth of Wage Inequality among Men in the United States, ? To what extent did the increase in wage inequality among men in the United States over the past three decades result from changes in the nature of job mobility? This question joins two central topics in recent research on labor markets. First, the well documented increase in men s earnings inequality in the United States since the 1970s has been recognized as one of the most dramatic features of the American stratification system during this period: inequality in men s wages increased sharply in the 1980s, leveled off in the early 1990s, and grew more modestly since then (Morris and Western 1999; Neckerman and Torche 2007; Gottshalk and Danziger 2005; Autor, Katz, and Kearney 2006). Second, the shift in the nature of the employment relationship away from relatively stable employment toward a new deal in which workers attachments to their employers have become more tenuous has been widely identified as creating widespread insecurity within the labor force (Cappelli 1999; Osterman 1999; Uchitelle 2006; Kalleberg 2009). The idea that changes in employment relations may have contributed to the rise in wage inequality is prominent in writing and research on labor markets. Osterman (1999), for example, argues that both job mobility and wage inequality have increased in recent years, creating a good news/bad news character to the U.S. labor market: those persons with marketable skills do well, while workers whose skills are in less demand suffer adverse consequences when they lose their jobs. Krugman (2006) illustrates these transformations in employment relations and increase in inequality in the United States by comparing the two largest civilian employers in the past three decades: General Motors in the 1970s, which provided stable employment, benefits,

4 2 and middle class wages for its production employees; and Wal-Mart, which currently employs 1.2 million workers and pays low wages, provides few benefits, and is characterized by high turnover rates and little reward for employer loyalty. The hypothesis that the divergence in economic payoffs to job mobility has led to greater wage inequality has been advanced perhaps most forcefully by Bernhardt et al. (1999, 2001), who maintain that the relationship between job mobility and inequality is where the link between labor market structure and individual life history is made, where we gain insight into the dynamic processes that actually generate inequality (2001: 16). In particular, they argue that changes in corporate restructuring and employment relations have diminished opportunities for upward mobility within firms and created greater wage inequality among workers who must compete for skilled jobs in the external labor market. Despite the widespread interest in how changes in job mobility may have generated greater economic inequality, systematic quantitative evidence on how these are related is conspicuously scarce. While the increase in wage inequality over the past thirty years has generated considerable debate regarding its causes (Autor, Katz, and Kearney 2006; Card and Dinardo 2002; Neckerman and Torche 2007) there is no definitive evidence as to whether this is due to changes in job mobility and instability. Yet the issue of how the economic pay-offs to job mobility may have changed is not only of theoretical interest, it is also of considerable importance for public policy: this question connects processes of human capital formation to the structures within which people move and wherein they are more or less able to obtain economic returns to their work experiences and skills. The few studies that have sought to relate changes in mobility and wage inequality are limited in important ways. Several authors have shown that the effect of employer mobility on

5 3 the variance of changes in workers wages has increased (Berhnhardt et. al. 2001; Stevens 2001; Polsky 1999), but this does not necessarily demonstrate that wage inequality has changed as the result of changing employers. Moreover, Bernhardt et al. s (2001) methodological framework which relies on a variance component approach that divides the increase in wage inequality into permanent and transitory inequality parts does not enable them to assess whether changes in instability were responsible for the observed growth in wage inequality over time. In this paper, we seek to evaluate the extent to which the rise of wage inequality among men in the United States during the past thirty years is due to changes in job mobility using data from the Panel Study of Income Dynamics (PSID) from In contrast to variance component models (Haider 2001; Stevens 2001; Bernhardt et.al. 2001), our model provides a simple, nonparametric decomposition of inequality into components due to within-employer wage changes and upward or downward between-employer mobility. We do this by first defining job transitions based on mobility over an initial two year period and then calculating the variance-covariance matrix of initial wages and the change in wages due to each type of job transition. This approach allows us estimate changes in inequality as the sum of two components: the variance of the change in wages for each type of job transition and the covariance of the change in wages with the initial wage, which allows us pinpoint the distributional impact of wage change. We use these results to draw conclusions about the role of job instability in inequality trends from and discuss the implications of our results for research on changes in employment relations and economic inequality. JOB MOBILITY AND WAGE INEQUALITY: PREVIOUS RESEARCH The internal labor market is the key concept that links job mobility to career trajectories and changes in wage inequality. We focus here on firm internal labor market (FILMs), though

6 4 internal labor markets are also found within some occupations (Althauser and Kalleberg 1981). FILMs represent job ladders that are associated with the progressive development of skill and knowledge. Workers enter the firm at the bottom of job ladders, and then receive progressively higher earnings as they move up the rungs of these ladders. FILMs have generally been regarded as a key feature of labor markets in the U.S. during much of the post-war period (Hall 1982). Beginning in the mid-1970s, corporate restructuring and other institutional and technological changes led to pressures on employers to reorganize the employment relationship by making it more market-mediated. Employers were less likely to be able to provide their employees with opportunities for long-term employment and upward mobility (Cappelli 1999). They thus encouraged their employees to invest in their own training, so as to make them more employable elsewhere in addition to being more valuable to the current employer. This strategy is consistent with a model of risk shifting (in this case, investments in training) from employers to employees and a decline in the use of FILMs. This scenario suggests that employers increasingly substituted market solutions for administrative rules as the employment relationship became more marketized. Accordingly, a number of writers have speculated that workers attachments to their employers have become more tenuous and discontinuous. Quantitative evidence as to the extent of this discontinuity is mixed. In part, this is due to researchers operationalizing job instability in various ways, such as employer tenure, job displacement rates, and job mobility. There is also no consensus on the extent to which there have been changes in employer mobility (i.e., movement from one employer to another), the indicator of job instability on which we focus in this paper. Using PSID data, Boisjoly, Duncan and Smeeding (1998), for example, found that the rate of changing employers increased since the 1980s (see also Rose 1995, and

7 5 Marcotte 1995). Moreover, Bernhardt et al. (2001) (using NLSY data) found a marked increase in instability (which they operationalized as the odds of working for a different employer over a two-year period) among young white men during the 1980s and early 1990s as compared to workers the same age in the late 1960s and 1970s, controlling for demographic, occupational and industrial differences between the cohorts. In addition to the decline in FILMs, they attributed some of this increase in instability to the growth of service sector industries (where employment is less stable on average), especially low-end, high turnover industries such as retail trade and business services. On the other hand, Gottschalk and Moffit (1999), Jaeger and Stevens (1999), and Polsky (1999) also using PSID data found little evidence of change in employer mobility. 1 Gottschalk and Moffitt s (1999) analysis was perhaps the most comprehensive, as they examined changes in short-term employer mobility using data from the Survey of Income and Program Participation (SIPP) as well as the PSID. In neither data set did they find an increase in employer mobility during the 1980s and 1990s (i.e., no increase in yearly exit rates), leading them to conclude (p. 125): we believe the evidence is now strong that any increase in instability between the 1970s and 1980s that may have existed did not persist into the present period. This conclusion is consistent with a number of the articles in the special issue of Journal of Labor Economics in 1999, which showed that it was difficult to find evidence of a significant increase in employer mobility in the U.S. over the last three decades (see Kambourov and Manovskii 2004: 5). 1 The differences between these studies may reflect in part differences in assumptions about measuring year-to-year changes (see the discussion in Bernhardt et al. 2001: 66, and Gottschalk and Moffitt 1999).

8 6 The lack of consensus on whether or not there has been an increase in employer mobility has led some to argue that the decline in long-term attachments between employees and their employers and claims that the use of FILMs has been reduced may have been exaggerated (e.g., Jacoby 1999). An alternative explanation is that there may have been countervailing forces that provided incentives to both employers and workers to preserve the continuity of the employment relationship, despite the decline in FILMs. In any event, the key question for this paper is not whether or not job mobility has increased, but rather if the economic pay-offs to such mobility have changed over time. To the extent that firm internal labor markets provided long-term employment that rewarded firm loyalty with gradual pay increases and dampened inequality among workers in the same firm, then a decline in FILMs could increase inequality as firms rely increasingly on external labor markets to fill positions without regard for firm tenure, paying a premium for highly-skilled workers but investing little in worker training (DiPrete, Goux and Maurin 2001). In a post-film environment, then, more wage growth and inequality should result from across-employer movement, regardless of whether such employer mobility actually increased. Workers are more likely to be forced to expose themselves to the supply and demand forces of external markets, resulting in highly skilled workers having greater opportunities to receive high wages, and low skilled workers losing the protections previously provided by their seniority and firm-specific knowledge within firms and thus more likely to experience declines in wages. However, it may also be the case that market mechanisms have greater impacts on wage-setting within organizations, regardless of whether there has been a decline in FILMs. If workers are increasingly able to improve their economic situation by changing employers, they are likely to

9 7 be more able to persuade their current employers to raise their wages in order to prevent them from acting on these threats. 2 We now summarize briefly some of the main ways in which the relationship between job mobility and wages has been studied in recent years. Changes in the Effect of Job Mobility on Wage Growth A number of studies have examined the links between employer mobility and earnings growth or decline using longitudinal data such as the NLSY (e.g., Bernhardt et al. 1999, 2001; Perticara 2002; and Light 2005). Topel and Ward (1992), using the Longitudinal Employer- Household Dynamics Data (LEHD), found that about 1/3 of wage growth occurs in workers early careers as the result of employer mobility. Moreover, the opportunity to increase wages was a key determinant of decisions to change employers among young workers. While the importance of upward job mobility for wage growth is not in doubt, there is conflicting evidence on trends in the relationship between employer mobility and wages. Using longitudinal data from the PSID and the Survey of Income and Program Participation (SIPP), Gottschalk and Moffitt (1999) found no evidence of a time trend in the effects of employer mobility on wages between the early 1980s and mid-1990s. Bernhardt et al. (1999, 2001) examined two cohorts of young white men (National Study of Young Men: ) and (NLS- Y: ) and assessed whether the association between job stability and wage outcomes changed between the two cohorts. In contrast to Gottschalk and Moffitt (1999), they found that 2 However, to make the threat credible, one would nonetheless expect to find some increase in the number of workers who actually carry out the threat, jumping to another employer that pays higher wages.

10 8 the pay-offs to employer mobility have declined in recent years; insecurity of employment (measured by involuntary separation from employment and job tenure) has increased and the penalty for insecure employment has increased dramatically. Age-earnings profiles have become flatter in successive cohorts (Bernhardt et al. 1999; 2001). They also found that the education wage differential is pronounced: the well-educated gain more than the less educated from changing employers; and the primary causes of wage decline for low-educated workers are the lower returns to work experience and increasing penalties for job shopping. Bernhardt et al (2001) also found that changing employers early in the career generally yielded larger wage growth than staying with an employer, though both the frequency of changing employer and the payoffs to this declined as workers got older (p. 88). This departs from the optimal progression of wage growth over the career as being an initial period of changing employers followed by stable employment with one firm (p. 89). DiPrete et al. (2002) used data from the job tenure supplements of the Current Population Survey (CPS) to estimate changes in the effects of job tenure and general experience on wages. They found evidence of a decline in the returns to job tenure over time and an increase in the returns to general labor market experience among college educated workers (but not among workers without a college degree). These results are consistent with an argument that there has been a decline in internal labor markets that has affected earnings trajectories. Effects of Job Mobility on Wage Inequality While there is, as discussed above, some evidence of changes in the effect of job mobility on wage growth, this literature does not directly address the question of wage inequality. To test whether the changing impact of job mobility has increased wage inequality, we need to show not the average effect of mobility, but demonstrate evidence of a differential impact on wages. In

11 9 other words, job mobility increases inequality if it increases the wages of some workers and decreases the wages of others; how big of an impact does it have? Using PSID data, Polsky (1999) found evidence that employer mobility may help to generate greater wage inequality. He showed that the negative consequences of involuntary job loss were worse in than in : workers were less able to get new jobs with another employer and for those who did, the odds of receiving a large wage cut increased from 9% to 17%. Nonetheless, his key finding is that the effect of employer mobility has changed. Among workers who switch employers voluntarily, the variance of their change in wages between employers increased from 34.6% in to 108.4% in Evidence of an increase in the 1-year variance of change in wages is also noted in Bernhardt et.al. (2001) and Stevens (2001). An increase in the variance of wage change is the kind of evidence that relates directly to inequality as it indicates a differential impact of job mobility on wage growth. Nevertheless, the one year change in wages may miss the role of job mobility on inequality over a broader period of time. Moreover, as we show below, the effect of wage changes on overall inequality depends on the worker s position in the wage distribution; hence an increase in the variance of wage changes does not demonstrate that inequality has changed as the result of job mobility. As a potential solution to these two problems, we next consider models of the effect of job mobility that estimate measures of inequality in wage trajectories. Variance Component Models The recent literature on job instability and inequality uses variance component models (Bernhardt et.al. 2001; Stevens 2001; Leonardi 2003; Amaral 2003) to divide inequality into permanent and transitory components. Using this method, Stevens (2001) and Leonardi (2003)

12 10 found that earnings instability for job-changers has increased over time. This conclusion would be consistent with the argument that a decline in FILMs has altered the impact of job mobility on wages and contributed to an increase in inequality. At the same time, however, this conclusion is misleading: as we discuss below, the variance component method is incapable of providing an overall decomposition of inequality into components due to employer mobility and withinemployer wage growth. In a simple model of permanent and transitory inequality, Gottschalk and Moffitt (1994) use PSID data to decompose inequality between and They define permanent income as the average income for each individual in each 9-year period and transitory income as fluctuations around each individual s mean income for the period. They found that 1/3 to ½ of the increase in the variance of earnings of white men from the 1970s to 1980s reflected short-term (transitory) increases (earnings instability) rather than long-term (permanent) increases in the variance of average earnings. However, while this approach has the advantage of being methodologically transparent and easy to calculate, it doesn t take into account life-cycle earnings patterns that should be incorporated into the concept of permanent income. Bernhardt et.al. (2001), Stevens (2001), Leonardi (2003) and Amaral (2003) estimate more complicated models based on Gottschalk and Moffitt (1994) and Haider (2001). Although the specification used in each paper is slightly different, the basic strategy is the same. First, a baseline model is estimated in order to calculate the wage residuals for each worker, (1) ln w it = α t + β t X it + ε it,

13 11 where ln w it is log wages or log earnings for worker i at time t, α t is period specific intercept, X it is a set of demographic variables (including a quadratic in experience), and β t is allowed to vary over time. The wage residual, ε it, is then divided into two components: (2) it ptui vit ε = +, where vit is an error term representing transitory fluctuations in wages, ui is a fixed individual effect, and pt is a time-specific multiplier of u i. The combination of u i and pt represents permanent income because they are based on fixed deviations of the individual s wages from the earnings trajectory defined by a quadratic in experience in Equation 1. In contrast, transitory income represents deviations from each individual s wage trajectory. Stevens (2001) and Leonardi (2003) use this model to estimate the effect of employer mobility on transitory inequality in the PSID by dividing their sample into employer changers and stayers in order to calculate the transitory component of income separately for each group. Stevens (2001) looks only at displaced workers and finds that wage instability is substantially higher among displaced job-changers than workers who stayed at the same job. Given the extensive literature documenting average wage losses to displaced workers (e.g. Kletzer 2003) it is not surprising that transitory wage variance would be higher among displaced workers compared to those who kept their jobs. Leonardi (2003) uses a similar approach to examine both voluntary and involuntary changes using the PSID. Similar to Stevens (2001), he finds that earnings instability increased more among employer changers than among stayers. Overall, however, the problem with the variance component models is that they are incapable of incorporating the effect of job mobility on permanent income because they parameterize permanent income as a fixed individual effect (the ui term in Equation 2 above).

14 12 Any deviation from the wage trajectory defined by ui and the demographic controls ( X it ) is considered transitory. In reality, however, this is a simplification: job mobility may affect permanent income, if it means getting a job at a relatively high (or low) wage organization that bumps the worker onto a different trajectory of wage growth. By splitting their sample into separate groups of job-changers and stayers, Stevens (2001) and Leonardi (2003) force any effect of job mobility on inequality to be expressed as a transitory wage change over a specific period of time. This will underestimate the long-term impact of job mobility affecting the worker s permanent wage trajectory. 3 Bernhardt et.al. (2001) adopt a different approach. In a variance component analysis using two cohorts of NLS data, they use the number of employers the worker has had to model the individual fixed-effect u i (see Bernhardt et al. 2001: 226 for a discussion). The problem with this approach is that it models differences in permanent income prior to an employer change as a function of the cumulative number of employer changes the worker experiences in the data. This parameterizes employer change as if it were a stable characteristic (i.e., the propensity to change jobs), while the real effect of employer mobility on inequality is that it results in wage changes at a specific point in time. To see the problems of the variance components approach, consider a simple example of three workers A, B, and C. All three workers are employed at the same wage, $10/hour from A and B do not change employers during this period, while C changes employers 5 times with no change in wages. In 2000 A finds a good job paying $20/hour and changes 3 Note that Gottschalk and Moffit s (1994) approach described above does a decent job modeling the effect of job mobility on inequality if workers only have 1 job change each and we divide each worker s observations into two samples, before and after the job change.

15 13 employers. Subsequently, A and B retain their current jobs and employers from 2001 to 2010, while C keeps the same wages but again changes employers 5 times. While the increase in inequality among the three workers in this example is all due to employer mobility the fact that A moved to a good job in 2000 the effect of mobility on inequality will be underestimated by the variance component approach, for several reasons. First, the approach of Stevens (2001) is potentially misleading as the long term effect of mobility on wages is considered to be transitory i.e. variation around the worker s permanent income even if the real effect of mobility is that it alters the workers long-run wage trajectory. Second, using the approach of Bernhardt et.al. (2001), one might not find a statistically significant effect of mobility on either permanent income or the variance in permanent income because the effect for worker A is swamped by the frequent employer mobility of worker C. In a recent paper on trends in earnings volatility, Shin and Solon (2008) argue that the drawback of the variance component models described above is that they rely upon complex models of earnings growth and that the results are sensitive to untested assumptions about model specification. As discussed above, in the case of job instability and inequality this problem is compounded by the assumption that job loss results in purely transitory departures from workers permanent earnings trajectories. In contrast, Shin and Solon adopt a simpler approach to study earnings volatility by calculating the variance in the change in wages over successive two-year periods in the PSID. In the methods section of our paper, we propose a model of the effect of job instability on wage inequality that is similar in spirit to Shin and Solon s (2008) approach by calculating changes in inequality based a simple variance decomposition approach. This model avoids the problems associated with the variance components approach and allows a direct test of the

16 14 hypothesis that a change in the consequences of job mobility due to a decline in internal labor markets has increased inequality. PSID DATA Assessing the implications of economic restructuring for career outcomes requires longitudinal data on individuals, since such data permit us to examine directly wage changes over the course of a person s career, and to link these changes to various kinds of job mobility. Our analyses use the PSID, which contains information on the career experiences of a national sample of individuals. 4 The PSID also allows us to follow individuals through unemployment spells (which can t be done using cross-sectional data sets such as the CPS). On the other hand, employers are not uniquely identified in the PSID (unlike the NLSY, for example), so a change of employers must be inferred using questions about length of employer tenure. The advantage of the PSID over the NLSY is that we capture a representative cross-section of the U.S. labor force, while the NLSY follows a single cohort. We restrict our sample of data from the PSID to because tenure with current employer is recorded using interval codes prior to 1976 (see Brown and Light 1992). After 1997 the PSID began to collect biannual, rather than annual, data. In order to make our analysis of the effect of job instability on inequality consistent with the pre and post-1997 data, we restrict our final analysis to the odd years of PSID data beginning in Other longitudinal panel data sets that are available to examine career mobility include the National Longitudinal Study of Youth (NLSY see Bernhardt et al. 2001; Gabriel 2003), and the Survey of Income and Program Participation (SIPP) (Gottschalk and Moffitt 1999).

17 15 In 1979 employer tenure was not asked, so we use a variable on the length of time in the current position. Because current position may include job changes with the same employer, we check the data by using the employer tenure data from 1981 and Workers who report a position change in 1979 or 1980 but report continuous employment with the same employer during that period on tenure data in 1981 or 1982 are recoded, but some within-employer job changes are still included. 5 In order to be comparable to most other analyses of mobility using the PSID, we restrict our analysis to male heads of household in the core sample of the PSID. A parallel analysis could also be conducted on trends in inequality and job mobility for women. When weighted (as in our analysis), responses of males in the PSID are representative of male household heads since We exclude cases with wage outliers (hourly wages greater than $400 or less than $5 in 2005 dollars), missing tenure data, or with less than 200 hours worked during the calendar year. We calculate wages as labor earnings during the calendar year divided by total hours of work. Consistent with much of the existing literature on transitory inequality in the PSID, we first estimate a preliminary regression of log wages on years of potential work experience (including squared and cubed terms), and dummy variables for year. 6 We then calculate the residuals for each case, and proceed to work with these rather than directly with log wages. This transforms each workers wage series into a set of deviations from the average life course trajectory of wages, which permits a clearer interpretation of the effects of various job transitions, as the positive or negative effect of a particular job transition is defined as wage 5 This procedure misses employer spells that include but end prior to the 1981 survey. 6 Potential work experience is defined as age- (years of education+ 6). All years of PSID data from are used in this preliminary regression.

18 16 growth relative to the average wage growth at a particular age. For example, even if a worker who loses his job gets back to his original wage level, the impact of the job loss is negative if he falls behind relative to the wage growth of other workers of the same age. A change in the shape of this average trajectory over time (i.e., if older workers earn more now than they did in the past) will be expressed in terms of a larger wage residual for these workers. -- Table 1 about here -- Table 1 provides basic descriptive information on trends in inequality and job mobility in the PSID from First, Table 1 shows time trends in the variance of the residual of log wages in our PSID sample. There is a substantial increase in inequality over this time period, as the variance increases from.207 in 1975 to.339 in Next, columns 4-6 of Table 1 show time trends in employer mobility. Based on the organization of our data into two-year periods, workers are classified as having moved to a new employer between waves if they have less than two years of tenure with their current employer. We then divide employer mobility into upward and downward mobility based on whether their current job pays greater than or less than the hourly wage at their previous job. Although we do not know the reasons for employer mobility, downward job mobility corresponds closely to the idea of involuntary job mobility or job loss, as the worker is unlikely to move voluntarily to a job with lower wages. Table 1 indicates that there has been no significant trend in the level of upward or downward job mobility over time in the PSID data, aside from slightly higher levels in 1977 and 1979 due to a difference in question wording (see page 15 above). What is unclear, though, is whether job instability, particularly the downward mobility depicted in Table 1, has an effect on trends in inequality. In order to answer this question, we now turn to our method for analyzing the impact of job mobility on inequality.

19 17 A VARIANCE DECOMPOSITION MODEL In contrast to the parametric models of changes in permanent and transitory inequality discussed above, the method we use in this paper is simple in that we use a direct calculation of the sequential change in the variance in log wages over two time periods. We use this method to decompose changes in inequality over 2, 4, 6, and 10 year time periods into components due to upward and downward employer mobility and differential rates of wage growth with the same employer. First, Equation 1 depicts the change in wages for individual workers over a two-year period: (1) ln wageit = ln wagei, t 2 +Δ samei +Δ upi +Δ downi Where ln wageit, 2 is the (residual) log wage of worker i at time t-2, and Δ samei, Δ downi, and Δ up i indicate the change in log wages for worker i based on three types of mutually exclusive job transitions between time t-2 and t: staying with the same employer, moving to a new employer with lower wages (downward mobility), and moving to a new employer with higher wages (upward mobility). For example, if worker i had a wage increase of.1 log points and stayed with the same employer, then Δ same i =.1 and Δ downi =Δ upi = 0. If we take the variance of both sides of Equation 1, and subtract the variance of ln wageit, 2from both sides, we have an equation for the change in inequality between time t and t-2: 7 (2) σ (ln waget) σ (ln waget 2) = σ ( Δ same) + 2cov( Δ same,ln waget 2) σ ( Δ up) + 2cov( Δ up,ln waget 2) + σ ( Δ down) + 2cov( Δ down,ln waget 2) + joint-effect 7 We thank an anonymous reviewer for suggesting this decomposition strategy.

20 18 where the term joint-effect on the right hand side of Equation 2 indicates a small effect of the nonzero covariance between Δ samei, Δ downi, and Δ upi due to a correlation among the means, despite the fact that they are exclusive categories. 8 Each of the terms in brackets on the right hand side of the equation represents the impact of specific types of job transitions on the change in inequality over the time period. The effect of job mobility depends not only on the variance of the change in wages for workers who experience a particular type of transition, but also on where in the original wage distribution those workers were from, which is indicated by the covariance term in each of the brackets. For example, the effect of upward employer mobility on inequality is the variance of Δ up (which is 0 for all workers who didn t experience upward mobility over this period) plus a measure of the covariance between Δup and the original wages at time t-2. This makes sense because the effect of an increase in the wages of upwardly mobile workers on inequality is ambiguous: if the upwardly mobile workers are at the low end of the income distribution then an increase in wages may decrease inequality, because cov( Δ up,ln wage 2) < 0, while an increase in wages to high-wage workers always increases inequality. When we extend the time frame of the analysis to look at 4, 6, and 10 year intervals, we keep the original definition of the job transition based on what happened between time t-2 and t, t 8 joint-effect = 2[Cov( Δsame, Δdown)+Cov( Δsame, Δup)+Cov( Δdown, Δ up)] ( a a)( b b) ( a b) [ 1 ( pa pb) ] where = = + + n ab, ab, indicates the possible ab, combinations of Δ samei, Δ downi, and Δ upi, and a p and p b are the proportion of cases with nonzero levels of a and b respectively.

21 19 regardless of whether the worker experiences an additional job transition by time t+2 or t+4. When we look at outcomes longer than the initial two year period, the change in wages associated with the (t-2 to t) job transition is updated to cover the period of analysis (i.e. the change in log wages from t-2 to t+2, t+4, or t+8). Table 2 illustrates the definition of these samples of different time periods. The motivation behind this definition of the samples is the idea of treatment and effect: the period from t-2 to t defines the job transition, which is the treatment, while the change in wages over the short, medium, or long term is the effect associated with a particular job transition. We look at longer time intervals in order to differentiate between transitory and longer term effects of job mobility on inequality. Even when we look at longer time periods, however, we continue to refer to the first two observations as t-2 and t to emphasize that the job transition is defined by employer tenure at time t. If, for example, the loss in wages for individual workers associated with downward employer mobility is large but transitory then there may be a significant effect on inequality over a two year period, but a smaller effect over longer periods. While we feel that this is the most logical approach to take, we will also consider alternative models where we exclude cases of job stayers (from t-2 to t) who experience downward employer mobility in subsequent periods. -- Table 2 about here -- The only exception to this coding of job transitions based on wage changes and employer tenure between time t-2 and time t comes from workers who appear in the data set at time t-2 but not at time t, either because they were out of the labor force or had missing wage data in the PSID. If these workers reenter the data at time t+2, t+4, or t+8 we code their job mobility based on whether their employer tenure is less than 4, 6, or 10 years (indicating a new job sometime between t-2 and t+2, t+4, or t+8, respectively). Cases that have valid wage and tenure data at

22 20 time t, t+2, t+4, or t+8 but no wage data for time t-2 are excluded from the analysis of the specific year and time window (2, 4, 6, or 10 years), as we can t calculate their change in wages over the specified time period. RESULTS Table 3 provides descriptive information on the effect of each type of job transition on the change in wages for individual workers over 2, 4, 6, and 10 year periods. As discussed above, the type of job transition is defined by employer tenure and wage change over the first two years (t-2 and t), and then we follow the impact of the job transition over various length intervals based on subsequent wage data. In Panel A, we see that workers who do not change employers in the first period have an average gain in (experience controlled, residual) log wages of.026 in the first two year period, and.045 over four years. While the average wage gain doesn t increase significantly after four years, the variance of log wages does, which indicates that inequality among these workers increases over time. -- Table 3 about here -- In Panel B of Table 3, we show the impact of downward job mobility on wages. Over a two year period, moving to a new employer with lower wages is associated with a wage loss of.355 log points. Although much of this is recovered over time, particularly between time t and t+2, the medium term effect of downward mobility is still substantial four years later at time t+4, where the average wage loss is.142 log points. Over 8 and 10 year windows, the negative impact continues to decline, to and -.080, respectively. The importance of Panel B is that it indicates that the impact of involuntary job mobility on the wages of individual workers, proxied

23 21 here by our measure of downward mobility, is not transitory in the sense there is a persistent negative effect even over 8 and 10 year windows. Finally, Panel C of Table 3 shows the effect of upward mobility from t-2 to t on wages over time. At time t upward mobility increases wages by.339 log points, but this declines to.270 at time t+4. This suggests that at least part of the effect of upward mobility on experience adjusted wages is either transitory or due to measurement error in the reporting of wages at time t. The majority of the effect, however, is permanent in that these upwardly mobile workers have wage changes that are substantially higher than workers who stayed with the same employer between t-2 and t, even 4 or 6 years after the job transition itself. Overall, however, while Table 3 points to compelling evidence of an effect of employer mobility on the wages of individual workers, it does not tell us anything about the effect of upward or downward employer mobility on inequality. To do this, we next turn to an analysis of changes in inequality using the model described above in Equation 2. Table 4 shows the variance-covariance matrices for the 2, 4, 6 and 10 year periods of analysis using all available cases from our PSID sample. First, we note that the results using all of the cases pooled together are potentially misleading given that the underlying wage distributions at different times gradually change as inequality increases (i.e., the distributions at time t-2 and t are not constant over time), but we begin with this table as a way of introducing our results. Overall, the results in Table 4 are very close to the more complete results presented below. -- Table 4 about here -- Panel A of Table 4 shows the variance-covariance matrix for the change in inequality between time t-2 and t. Diagonal elements are variance terms and off-diagonal elements are

24 22 covariance terms. The final column of each panel shows the estimated overall effect of each job transition, calculated using Equation 2 as the variance of the change in wages plus two times the covariance with initial wages. Note that the variance terms will differ from the variances reported in Table 3, as Table 3 presents the effect for workers who experienced a particular type of transition, while Δ samei, Δ downi, and Δ upi include 0s for workers who did not experience the specific job transition. To begin with, the variance of log wages at time t-2 is.251. To calculate the effect of each type of job transition on the change in inequality from time t-2 to t we calculate the terms in the three brackets on the right hand side of Equation 2, which is the variance in the change in wages for each type of job transition plus two times the covariance with wages at time t-2. For example, the effect of staying with the same employer is (the variance of Δ samei ) plus 2 x , the covariance between Δ samei and log wages at time t-2. As a result, staying with the same employer increases overall wage inequality by.0055 in the pooled data. The negative covariance between Δ samei and log wages at time t-2 indicates that same-employer wage growth is stronger among workers with less than average wages, and this negative covariance washes out most of the inequality-generating effect due to the non-zero variance of Δ samei. In contrast to same-employer wage growth, the impact of downward employer mobility on inequality is relatively large over a two-year interval. Although the variance in smaller than the variance of Δ downi is Δ samei, the covariance term is closer to zero as well, and the overall effect is 2(.0069) ) = or about 2.5 times the effect of Δ samei. In contrast to Δsame i and Δ downi, the effect of upward job mobility over a two year period is close to zero in the pooled PSID data because two times the negative covariance term almost completely cancels

25 23 out the variance of the change in wages of Δ up. Finally, the covariance terms between Δ samei, Δ down i, and Δ upi result in a joint effect on inequality discussed above in footnote 8. The effect is relatively small compared to the other three effects described above (the effect is 2*( ) = ). In panels B and C of Table 4, we decompose the impact of job transitions between time t- 2 and t on inequality over a 4 and 6 year period. The key finding here is that the impact of downward mobility on inequality declines as the time period increases. Over a 4 year time period (Panel B), the effect is 2(.0082) =.0078, and over a 6 year time period it is 2(.00789) = The declining effect of downward job mobility on inequality reflects the fact that some of the decline in wages associated with downward job mobility is transitory, as indicated in Table 3. The overall decline in the magnitude of the effect is about 40% as we go from a two to a six year window in Panel C. On the other hand, it is important to point out that the effect does not go away, which is consistent with the persistence of average wage losses for downwardly mobile workers noted in Table 3. This result demonstrates that the variance components models that estimate wage trajectories by assuming that all of the effect of job loss on inequality is transitory (discussed above) are misleading: in contrast, we find there is a persistent medium-term effect of downward mobility on inequality. The impact of same-employer wage growth on inequality, which was smaller than the effect of downward mobility over a two year period, turns out to be considerably more important when we follow workers over a four or six year period. In panel C, the effect over a six year window is 2(.03814) =.0328 or about 4.5 times the effect of downward job mobility. This is due to the fact that the variance of Δsamei increases over time (from.0755 after two years to.1091 after 6 years). Another way to look at the comparison between the impact of Δ samei

26 24 and Δdowni is to note that while the variances of the change in wages are fairly similar in Table 3, the effect on inequality of Δsamei is larger because only a minority of cases experience downward job mobility in a given year. In panel D of Table 4, we extend our window of analysis to a 10 year time period. As before, the job transitions are defined by observing employer tenure and wage changes between time t-2 and t, and then we follow the worker for 8 years to time t+8. Because of this long time frame our analysis doesn t include cases of job mobility after 1997 (where t+8 = 2005), because our PSID sample stops in The key finding from Panel D reiterates the basic findings from Panels B and C. The impact of involuntary employer mobility on inequality as picked up by our measure of downward employer mobility is not transitory. Even over a ten year period, downward mobility between t-2 and t still affects inequality 8 years later. The calculated effect of downward mobility is 2( ) = In contrast, the effect of upward mobility is.00138, and the joint effect is All of these effects, however, are dwarfed by the long-term impact of those who stayed with the same employer between t-2 and t, which is Another way to look at this is that the overall increase in inequality based on the covariance matrix in Panel D is , so the long term (10 year) impact of downward employer mobility on inequality explains 12.2% (.00914/ ) of the increase in inequality over a given ten year period in the PSID. The basic conclusion from Table 4 on the effect of job transitions on inequality is consistent with the descriptive evidence in Table 3 on the effect of downward employer mobility over time. Although there is a large effect on average wage changes over a two year time period, the effect is mitigated over time by subsequent wage growth, although it does not go away even over a ten-year window of observation. Thus some, but not all, of the effect on average wages is

27 25 transitory. Overall, we conclude from Table 4 that over a two year period, downward employer mobility has the largest effect on changes in inequality. However, some of this effect is transitory and the medium or long term effect is smaller than what happens, over time, to the large body of workers who do not change employers between time t-2 and t. The key transition in our results is between the 2 and 4 year windows of analysis, where the largest inequality-generating transition switches from downward employer mobility to staying with the same employer. Consequently, a reasonable question concerns the possibility of downward mobility between time t and t+2 of workers who stayed with the same employer between time t-2 and t. For example, Panel A of Table 5 shows the relationship between job mobility between t-2 t and t t+2. Of the 10,865 cases with no mobility in the first period, 6.53% experienced downward employer mobility in the second period. To test whether the switch in the effect of mobility on inequality is being driven by these workers, we generate the 4 year variance-covariance matrix of wage changes identical to Panel B of Table 4, except we exclude workers who were job stayers during the first period but experienced downward employer mobility between time t and t+2. In Panel B of Table 5 we see that the downward mobility of workers in the second period is not causing our results, as the 4-year effect on inequality for job stayers is.012 (= *.0360) while the effect for workers who are downwardly mobile in the first period is.0083 (= *.0085). Note, however, that the difference between the two effects is smaller than in Panel B of Table Table 5 about here -- We can extend this approach by looking at the 6 year window, excluding workers who were job stayers in the first period but who experienced downward mobility some time between t and t+4. As shown in Panel C of Table 5, the large inequality-producing effect of workers who

28 26 stay with the same employer between time t-2 and t is very similar to the results in Panel C of Table 4 (.0229), and it is about 2.5 times the size of the effect of workers who experienced downward employer mobility between t-2 and t (.0087). On the basis of the results for the 6 year period of analysis in Panel C of Tables 4 and 5, we conclude that the differential rates of wage growth among workers who do not change employers has a larger effect on inequality than downward employer mobility in the medium term, as some of the inequality-generating effect of downward employer mobility is transitory. Table 6 calculates the effect of each type of job transition on inequality separately for each year of our sample. This is a more accurate approach than the pooled data discussed above, but small sample sizes (i.e. around per year) and year-to-year fluctuations in inequality make the results harder to interpret. Readers who are concerned that cases may provide multiple observations for the same year (i.e., 1990 could be the first year of a four year period beginning in 1990, or the final year of a four year period beginning in 1988) can inspect the results for mutually exclusive samples by looking at every other row (for mutually exclusive 4 year samples) or every third row (for 6 year samples). The final row of Table 6 calculates that average effect across all years. Although this differs from the pooled results in Table 4 because we calculate the year-by-year results first and then take the average, the results are very similar. While downward job mobility has the largest effect over a two-year period of analysis (.012 versus.005 for Δ samei ), same-employer effects dominate over a 4 and 6 year period (.032 over six years versus.0075 for Δ downi ). In contrast to both Δ samei and Δ downi, the effect of upward employer mobility reduces inequality in all three windows of analysis, although the effect is small (-.008 over two years and over six years). -- Table 6 about here --