Job-to-job transitions, sorting, and wage growth

• Published in: Labour economics 2018-12, Vol.55, p.300-327
• Main Authors: Jinkins, David, Morin, Annaïg
• Format: Article
• Language: English
• Subjects: Assortative matching; Fixed-effect wage models; Job mobility; Panel data models
• ISSN: 0927-5371; 1879-1034
• DOI: 10.1016/j.labeco.2018.10.008

•We provide evidence that two-way fixed-effect wage models are not suited for the analysis of wage growth.•We argue that the quality of the worker-firm match affects wages and hence triggers worker mobility.•We propose a novel estimation strategy that allows us to quantify the contribution of the match effect to wage growth.•We show that 44% of the wage growth experienced by job-to-job movers can be attributed to an improvement in match quality.•We find that 66% of the variance in wage growth is explained by the variance of the change in match effects. In this paper we measure the relative contribution of firm effects and match quality to wage growth experienced by workers moving between jobs. We provide evidence that firm effects only explain a small share of the observed wage dynamics. We also show that standard assumptions on match quality used to estimate fixed-effect wage models are not well supported in Danish data. We propose an alternative strategy to estimate an additive model of wage changes that includes a freely-varying match effect for all but a subset of job changers. Using estimates from Danish linked worker-firm data, we find that 44% of the wage growth experienced by job-to-job movers is attributable to an improvement in the quality of the worker-firm match, and 66% of the variance of wage growth is explained by the variance of the change in match effects.