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Inter-industry wage differentials revisited: Wage volatility and the option value of mobility

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  • Neumuller, Seth

Abstract

Analysis of data from the PSID reveals that idiosyncratic wage volatility varies inversely with inter-industry wage differentials and is positively correlated with both returns to industry tenure and rates of inter-industry mobility. An incomplete markets life cycle model in which inter-industry mobility decisions and wage differentials are endogenously determined in equilibrium is then developed and shown to be capable of rationalizing these features of the data. In the model, the ability of worker to switch industries generates option value that is large enough to offset the standard risk premium that workers demand for exposure to excess wage volatility.

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  • Neumuller, Seth, 2015. "Inter-industry wage differentials revisited: Wage volatility and the option value of mobility," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 38-54.
    • Handle: RePEc:eee:moneco:v:76:y:2015:i:c:p:38-54
    DOI: 10.1016/j.jmoneco.2015.08.001
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    Cited by:

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    3. German Cubas & Pedro Silos, 2020. "Social Insurance And Occupational Mobility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 219-240, February.
    4. Hero Ashman & Seth Neumuller, 2020. "Can Income Differences Explain the Racial Wealth Gap: A Quantitative Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 220-239, January.
    5. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output," Working Papers 16-25, Center for Economic Studies, U.S. Census Bureau.
    6. Munechika Katayama & Kwang Hwan Kim, 2018. "Uncertainty Shocks and the Relative Price of Investment Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 163-178, October.
    7. German Cubas & Pedro Silos & Vesa Soini, 2021. "Risk and the Misallocation of Human Capital," DETU Working Papers 2103, Department of Economics, Temple University.
    8. German Cubas & Pedro Silos, 2017. "Career Choice and the Risk Premium in the Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 1-18, October.
    9. Cubas, German & Silos, Pedro & Soini, Vesa, 2024. "Risk and the allocation of talent in the Roy model," Economics Letters, Elsevier, vol. 236(C).
    10. Eleanor W. Dillon, 2018. "Risk and Return Trade-Offs in Lifetime Earnings," Journal of Labor Economics, University of Chicago Press, vol. 36(4), pages 981-1021.
    11. Ori Zax, 2017. "Promotion Policies at Different Firms," Economics Bulletin, AccessEcon, vol. 37(2), pages 1045-1054.
    12. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2019. "Staying the Course or Rolling the Dice: Time Horizon’s Effect on the Propensity to Take Risk," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 42(1), pages 66-85.

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