Wage Cuts as Investment in Future Wage Growth

Helen Connolly () and Peter Gottschalk

LABOUR, 2008, vol. 22, issue 1, 1-22

Abstract: Abstract. Wage cuts are often presumed to reflect an adverse change in economic constraints. However, several theoretical models have shown they can be a form of investment in future wage growth. This paper provides empirical evidence of the latter by explicitly modeling the worker's job choice when the job offer consists of both a starting wage and expected future wage growth. We use our analytical model to estimate the distribution of job offers faced by workers who are searching across jobs differing in both initial wage and expected wage growth. For females, roughly one‐third of job changes that result in immediate wage cuts are transitions to jobs that have a higher value function than the existing job. For males, the corresponding value is one‐fifth.

Date: 2008
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https://doi.org/10.1111/j.1467-9914.2007.00404.x

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