revised version published in: Economic Inquiry, 2017, 55(1), 260-280
I use the PSID to decompose the rise in wage inequality into a permanent and a transitory
component. I consider separately job stayers and job changers. I find that earnings instability
(the variance of the transitory component of earnings) increased much more among job
changers than among job stayers. I interpret the evidence in a search and matching model
with on-the-job search. The increasing variance of the transitory component of earnings is
modeled as a mean-preserving spread of the distribution of productivity shocks. The meanpreserving
spread induces on-the-job search on a wider range of productivity values. As a
result of increased on-the-job search, the variance of the transitory part of earnings increases
among job changers. The direction of the change in the transitory variance across job stayers
is ambiguous and depends on their composition between non-seekers and on-the-job
seekers who did not find a new job.
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