The Aggregate Consequences of Labor Market Fluidity

Abstract:

Using panel data for 1990--2014 from 12 OECD countries, I document three facts: First, job-to-job mobility and life-cycle wage growth differ substantially across countries. Second, countries with higher labor market fluidity see greater life-cycle wage growth. Third, the wage gains directly associated with job-to-job mobility account for only 40 percent of the steeper wage growth in more fluid labor markets. To account for these facts, I propose a theory of on-the-job search and human capital accumulation, which highlights that a faster rate of climbing the job ladder encourages human capital investment by raising its expected return. The mechanism accounts for the covariation between fluidity and wage growth, and implies that two standard deviations lower fluidity is associated with 11 percent lower aggregate output.