On-the-job search, productivity shocks, and the individual earnings process

Abstract

Individual labor earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with on-the-job search, wage renegotiation by mutual consent, and i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean, and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes. Structural estimation of our model on a 12-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure that is remarkably consistent with the data.