Cyclical Earnings and Employment Transitions

Speaker: Dr David Wiczer, Stony Brook University

Abstract: Recessions increase unemployment risk and decrease flows across employers and occupations. This paper connects cyclical differences in the earnings change distribution with cyclical differences in workers flows. Because earnings changes are larger when workers change jobs and even larger when switching occupation the incidence of flows directly affects the tails of the distribution of earnings changes. However, the business cycle also affects earnings outcomes conditional on a job, employment status and/or occupation change. We statistically decompose cyclical movements in the earnings change distribution into worker-flow components and “returns” components. This highlights that the increase in non-employment duration is particularly important for explaining large earnings losses, while earnings gains are affected by more varied causes. Then, because job and occupation switching are endogenous, we introduce a business cycle model with on-the-job search and occupational mobility, which emphasizes that cyclical fluctuations in exogenous flows, rather then endogenous choices or returns, drive dynamics of the tails of earnings growth.