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The Link between Wages and Switching Careers

Tuesday, February 20, 2018
Business people meeting in sunny conference room

By Paulina Restrepo-Echavarria, Economist, and Brian Reinbold, Research Associate

From the early 1970s until the mid-1990s, the labor market experienced several significant changes:

  • Increased wage inequality
  • More volatile wages
  • Increased occupation switching by individuals

In the early 1970s, the fraction of workers switching occupations in the U.S. was as high as 16 percent a year. By the mid-1990s, it had increased to 21 percent.1

As such, it is important to understand the potential effects of occupational mobility on the labor market.

Job Switching and Denmark

In a 2015 paper, economists Fane Groes, Philipp Kircher and Iourii Manovskii documented a new set of facts characterizing occupational mobility by using administrative panel data for Denmark.2 The Danish register data, as opposed to U.S. data, provides detailed demographic, occupational and wage data on 100 percent of the population. This, then, provides sufficient data to fully represent each occupation.

Middle Earners vs. High/Low Earners

They found that mobility was U-shaped for most occupations. In other words, low- and high-wage earners within an occupation had a higher probability of leaving their occupation, but medium-wage earners were more likely to stay in their current job.

Furthermore, the low-wage earners tended to switch to new occupations with lower average wages while high-wage earners were more likely to switch to new occupations with higher average wages. Exceptions occurred in occupations with steeply rising or falling productivity.3

Link between Skills and Wages

The authors then showed theoretically that high-ability workers within an occupation indeed tended to earn higher wages. In turn, earning higher wages increased their confidence in their abilities and induced them to move to a more skill-intensive occupation, generating (predominantly) upward mobility.

Workers in the middle of the occupational wage distribution, who tend to have middle skills, were less likely to gain confidence. As such, they did not switch to new occupations as often. That is, their mobility was lower.

Low-ability workers within an occupation tended to earn lower wages, and changes to their perceived ability might induce them to move to an occupation with lower skill requirements, inducing (predominantly) downward mobility.

Success in Current Job and Moving On

This suggests that high wages are not necessarily a sign that a person is particularly well matched in his current occupation. Maybe it is a sign of overqualification that induces workers to look for a job that is better suited for them.

To account for these patterns, the authors suggested that it might be useful to think of occupations as forming “vertical hierarchies.” That is, complementarities between the productivity of occupations and the abilities of workers induce them to look for occupations where they have an absolute advantage.

Since people are not fully aware of what their absolute advantage is, they update their beliefs about their ability after observing their output in their initial occupation and re-sort themselves according to this new belief. As there are only a given number of jobs in each occupation, workers compete for these positions.

Notes and References

1 Kambourov, Gueorgui; and Manovskii, Iourii. “Occupational Mobility and Wage Inequality (PDF).” Institute for the Study of Labor, 2009, Vol. 76, No. 2, Pages 731-759.

2 Their analysis is based on male workers to avoid the impact of fertility decisions by women on labor market transitions.

3 Groes, Fane; Kircher, Philipp; and Manovskii, Iourii. “The U-Shapes of Occupational Mobility (PDF).” The Review of Economic Studies, 2015, Vol. 82, Issue 2.

Additional Resources

Posted In Labor  |  Tagged paulina restrepo-echavarriabrian reinboldlaborjob switchingwages
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