History dependence in wages and cyclical selection: Evidence from Germany

Using administrative data from Germany, this paper analyzes the relation between wages and past and current labor market conditions. Specifically, it explores whether the data is more consistent with implicit contract models (Beaudry/DiNardo, 1991) or a matching model with on-the-job search and cyclical selection (Hagedorn/Manovskii, 2013). The data suggests that wages are related to past labor market conditions as contract theories postulate. However, past labor market conditions also affect contemporaneous wages through the evolution of the match qualities over a worker's job history - the main hypothesis of the selection model. Refining the selection model by taking into account within company job regrading, we find that wages of workers who switched employers and occupations at the same time respond stronger to the cycle than wages of job stayers. In contrast, wages of workers who only switch employers or occupations are not more cyclical than wages of workers who stay at their previous employer and in their previous occupation.