Wage Distributions and Wage Dynamics in Europe and the US: Lessons from a Simple Job Search Model

Abstract

Job search models of the labor market hypothesize a very tight correspondence between the determinants of labor turnover and individual wage dynamics on one hand, and the determinants of wage dispersion on the other. This paper offers a systematic examination of whether this correspondence is present in the data by estimating a rudimentary partial equilibrium job search model on a 3-year panel of individual worker data covering 10 European countries and the U.S. We find that our basic job search model fits the data surprisingly well. This also allows us to point at a number of interesting empirical regularities about wage distributions. Our results suggest that cross-sectional data on individual wages contain the basic information needed to obtain reliable estimates of the "search frictions" parameters of a canonical job search model. Finally, we use our results in a cross-country comparison of the intensity and nature of job-to-job turnover. We arrange countries into two different groups according to their turnover intensity. We further show that the nature of job-to-job turnover is very different between those two groups: turnover is predominantly voluntary in the group of low-turnover countries (which roughly coincides with continental Europe), whereas it is to a large extent involuntary in high-turnover countries (Denmark, the U.K. and the U.S.)Labor market frictions, wage distributions, wage dynamics, job mobility