Wage Cuts as Investment in Future Wage Growth: Some Evidence

Helen Connolly () and Peter Gottschalk
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Helen Connolly: Northeastern University

Boston College Working Papers in Economics from Boston College Department of Economics

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 o§er consists of both a starting wage and expected future wage growth. We use our analytical model to estimate the distribution of job o§ers of less-educated workers. Roughly one-third of wage cuts experienced by these workers are transitions to jobs that have a higher value function than the existing job.

Keywords: wage dynamics; wage growth; job choice (search for similar items in EconPapers)
JEL-codes: J31 J60 (search for similar items in EconPapers)
Date: 2002-10-22, Revised 2004-09-30
Note: Paper previously circulated under the title "Job Search With Heterogeneous Wage Growth--Transitions To "Better" And "Worse" Jobs"
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Citations: View citations in EconPapers (5)

Published, Labour: Review of Labour Economics and Industrial Relations

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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:543

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