Wage Risk, On-the-job Search and the Value of Job Mobility

This paper shows that job mobility is a valuable channel in response to labor market shocks for employed workers. I construct a model of wage dynamics jointly with a structural dynamic model of job mobility. The key feature of the model is the specification of wage shocks at the worker-firm match level, for workers can respond to these shocks by changing jobs. The first result is that the variance of match-level shocks is large, and the consequent value of job mobility is substantial and decreasing in the cost of switching jobs. The second result is that true wage risk is more than twice as large as the wage variance observed after job mobility, which is what other papers in the literature have called wage risk. JEL: D91, J31, J62 ∗Previously circulated under the title “Wage Risk, On-the-job Search and Partial Insurance”. I am grateful to Robert Moffitt and Stephen Shore for guidance and support and to Peter Gottschalk for detailed comments. I also thank the participants at numerous seminars and conferences for helpful comments and discussions. All remaining errors are mine