Better LATE? Instrumental Variables Estimation of the Returns to Job Mobility during Transition

Recent theoretical contributions to the problem of job mobility decisions during the transition from a centrally planned economy to a market economy suggest that individuals self‐select into specific forms of job mobility behaviour on the basis of their unobservable characteristics. In this case, standard results from both simple treatment–control comparisons of average income and from OLS regressions of reduced‐form earnings equations do generally not identify any causal effect of job mobility on income. This paper addresses the endogeneity problem related to job mobility in a quasi‐experimental framework and estimates the returns to (early) job mobility in the Eastern German transition process for the period 1990–96. Identification is based on instrumental variables estimation. Two instruments are suggested that account for some of the variation in the job mobility behaviour throughout transition. They allow further for a natural distinction between forced and voluntary movers on the basis of the local average treatment effect (LATE) interpretation of IV estimates. Estimation results contrast strongly with results from both simple treatment–control comparisons and simple OLS estimation. They suggest negative returns to forced job mobility as opposed to positive returns to voluntary job mobility early in transition, thus stressing the existence of heterogeneous returns to job mobility.