Previous literature has found that tight labor market conditions during
a job raise wages. Using the Displaced Worker Survey from 1984 to 2006, we show that wage gains associated with good labor market conditions disappear at job loss. We also find that workers with higher wages due to tight past labor market conditions face higher
risk of layoff. These findings suggest an important role of persistent
rigidities in the wage setting process that are related to layoff decisions.
This supports the notion that downward rigid employment contracts help explain the Shimer (2005) "puzzle" of low wage relative to employment fluctuations. (JEL J31, J41, J63)
Schmieder, Johannes F., and Till von Wachter.
"Does Wage Persistence Matter for Employment Fluctuations? Evidence from Displaced Workers."
American Economic Journal: Applied Economics,
Wage Level and Structure; Wage Differentials
Labor Turnover; Vacancies; Layoffs