published in: Review of Economic Studies, 2009, 76 (2), 731-759
In this study we argue that wage inequality and occupational mobility are intimately related.
We are motivated by our empirical findings that human capital is occupation-specific and that
the fraction of workers switching occupations in the United States was as high as 16% a year
in the early 1970s and had increased to 19% by the early 1990s. We develop a general
equilibrium model with occupation-specific human capital and heterogeneous experience
levels within occupations. We argue that the increase in occupational mobility was due to the
increase in the variability of productivity shocks to occupations. The model, calibrated to
match the increase in occupational mobility, accounts for over 90% of the increase in wage
inequality over the period. A distinguishing feature of the theory is that it accounts for
changes in within-group wage inequality and the increase in the variability of transitory
earnings.
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