Sources of Earnings Instability : Estimates from an On-the-Job Search Model of the U.S. Labor Market

Many contributions suggest that earnings instability has increased during the 1980s and1990s. This paper develops and estimates an on-the-job search model of the labor market tostudy the contribution of wage inequality and job mobility in explaining earnings instability. Tostudy the evolution over time of these different components we extract two estimationsamples (late 1980s and late1990s) from the Calendar Section of the PSID. We find that themain differences in the structure of the labor market between the two periods are in the jobto-job mobility and in the variance of the wage offer distributions: they both increase in thelate 1990s. By generating counterfactual experiments, we also show that they bothsignificantly contribute to the increase in earnings instability even if it is only their joint effectthat generates what we observe in the data. Finally, we show that significant compositioneffects are at work since the behavior of skilled workers and unskilled workers are verydifferent with respect to the above-mentioned labor market dynamics.