Earnings Variance of Job Stayers and Job Changers

There is still no consensus on the causes of the increase of earnings instability in the US in the '70s and '80s. It is difficult to attribute the increase to job mobility because there is no evidence of a contemporaneous decline in job stability and job security. Using covariance structure models, this paper shows that job mobility accounts for a substantial part of the increase in earnings instability. The empirical evidence is consistent with the predictions of a search and matching model where an increase in the variance of productivity shocks increases on-the-job search and earnings instability among job changers while leaving job turnover constant. The model can explain the increase over time in the earnings variance of job changers but cannot explain the increase in the transitory earnings variance of job stayers.