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 and 1990s. This paper develops and estimate an on-the-job search to assess the contribution of job mobility to explaining earnings instability. Using two estimation samples (late 1980s and late1990s) from the PSID, we find that the main differences in the structure of the labor market between the two periods are in the probability to receive an on-the-job wage offer and in the variance of the wage offer distribution: they both increase in the late 1990s. By generating counterfactual experiments, we also show that they both significantly contributes to the increase in earnings instability but that it is only their joint effect that generates the magnitudes observed in the data. Finally, we show that significant composition effects are at work since the behavior of skilled workers and unskilled workers are very different with respect to the above mentioned labor market dynamics.