10.2 Job matching
The theoretical framework for analysing job mobility lies partially within models of job-search and job matching.
Several authors have developed variations of such models, which we will not review here. But as an example, Pissarides’ (1994) model distinguishes between good jobs and bad jobs, and depicts a situation where firm’s output and employees’ wages are a positive function of firm-specific human capital. In this model, firms invest in employees’ training in skills specific to the business of the firms, and reward the acquired skills by higher wages. Good jobs are those that offer such training and advancement opportunities, while bad jobs do not. Low paid jobs are initially a combination of good and bad jobs. Connolly and Gottschalk (2001) extend the idea of a good job that is low paid to include one which improves the range of job offers that the employee will face in the future.
Mortenson and Pissarides (1999: 2619) conclude that current state of the art of modelling of job matching produces the conclusion that
. . .wage dispersion can induce endogenous differentials in labor productivity rather than simply reflect exogenous differences--an employer offering a higher wage has an [sic] greater incentive to make match specific productivity enhancing investments because the future return on the investment is subject to a less quit risk.
One implication of Pissarides’ and other such models is that good entry jobs are more competitive because they are sought after, not only by unemployed people, but also by employed people already in bad jobs or in good jobs to which they are mismatched (on-the-job search). This “sorting” is confirmed by Blanchard and Diamond (1994). Where there is structural unemployment (ie, the number of applicants is higher than the number of vacancies), other things equal, the already employed will generally be preferred to the unemployed applicant. Blanchard and Diamond (1994) speculate that this may be caused by the fact that many firms believe that unemployment duration either signals or causes “below average skills or work ethic”. If we adopt the interpretation of Blanchard and Diamond, then the most likely upward mobility path of a previously unemployed and unskilled person is:
(0) Unemployment
(1) Bad entry job
(2) (Non-matching good entry job)
(3) Matching good entry job
(4) High wage/skills job after training
Starting from unemployment, an unskilled job seeker has little chance of finding a “good entry job”. This is because these jobs are sought after by people in other “good jobs”, which do not match their interest, as well as those in “bad entry jobs”. Because these two groups have more experience and do not carry the negative signal of being unemployed, their chances of getting the job, other things equal, are higher. So, the unskilled job seeker would start with a “bad job”. From the “bad job”, the worker has better chances than an unemployed job seeker, of shifting to a “good entry job” and growing from there. There is a possibility that the worker may not find a good job match at first. In this case, the worker engages in on-the-job search until a match is found. Subsequent wage growth would then occur through obtaining a better match, and through training and promotion. This is the optimistic scenario. The pessimistic scenario can be either no job or getting stuck in a bad entry job, or some combination of the two (moving between bad jobs and unemployment/non-employment). This general process is supported by the work of Gregg and Wadsworth (2000). They find that for UK workers, people who enter a new job from previous employment earn substantially more, other things equal, than people who enter a new job from non-employment.
Note that even the skilled unemployed might find it rational to go through this pathway, if there is structural unemployment. This might happen to previously employed parents after a period out of the labour force to care for children, or to displaced workers.
Job mobility and wage mobility are two intrinsically different phenomena, although they are related. An employee can move up or down the wage ladder without changing employer. And a worker can change employer without changing wage. Gottschalk (2001) provides evidence that both of these things happen: indeed, real wages rise, fall and stay the same for workers who stay in their job and for those who move. The relation between job change and wage change is quite complex, and the average relation between job mobility and wage mobility conceals as much as it reveals. Despite this complexity, there is consistent evidence that people who change jobs voluntarily (and go straight to a new job) on average experience a rise in pay. For low skilled workers, there is some evidence that a job change that also involves a move to a different industry is the most beneficial strategy (they have little specific capital to lose by such a move). Staying in one’s current job is on average not the best strategy for obtaining a wage rise for low skilled people. (De Grip and Nekkers, 2001).
On average a voluntary move to a new employer is associated with the higher wage gain than staying with the same employer. For women in the US the gain from staying was typically 3.2% (2.0% for men). On shifting voluntarily (ie, obtaining a better match), women gained an immediate 1.7% average wage increase and men an immediate 3.1% increase. (Gottschalk, 2001:11). These, however, are average figures. For low education (the nearest we can get to low wage) workers, the gain from a better job match (and the gain from staying with the current employer) was substantially less for men who had not completed secondary school than for college graduates. However, the relative gain of moving voluntarily compared with staying was similar for the two education groups. For women, it is a different story. Low education women gain almost as much (in percentage terms) from a voluntary job shift as do high education women (about a 4% wage gain). In contrast, low education women face very low (1%) wage gains on the job compared with 7.5% for college educated women. This suggests that for low wage women, searching for a better job match is a superior strategy for obtaining a wage rise than staying with their current employer. The advantage of searching for a better job match is much less apparent for low education men.
Gottschalk, 2001, emphasises that the average experience conceals a great deal of diversity. While on average a move direct to a new job increases the wage, for many it does not. About half of both men and women who had not completed secondary school experienced a drop in their wage on moving direct from one job to another. If the job move was involuntary for low education workers (as indicated by a spell of unemployment in between), then the new job on average had a lower wage than the initial job and almost 60% experienced a fall in their wage.
Efficient job matching requires that there is no discrimination. The evidence for state dependence provided in, eg, Stewart and Swaffield (1999) and Stewart (2002) suggests that employers use employment in a low paid job as a signal—perhaps of low productivity, perhaps of a propensity to high turnover. Other things being equal, (eg, education, experience, gender) they are therefore reluctant to employ a person who has been in a low wage job for reasons that may not truly reflect the worker’s potential productivity in the job.
10.2.1Choosing the right employer
Employers do matter. If the structure of employment is such that a high proportion of jobs is low wage/low skill, then upward mobility will be the more difficult. Davis (2001) argues that a competitive market with decentralised search for job matches between firms and workers will lead to a proportion of low skill jobs that is inefficiently high. This in turn is highly likely to reduce overall wage mobility.
Lane and Stevens (2001), show that the characteristics of the employer do affect the likelihood of a worker of given characteristics having low wages. Workers with poor characteristics tend to be employed a) with other like workers and b) by firms that, ceteris paribus, pay relatively low wages. There are low paying firms within industries, and low paying industries (especially food and drink, retail, business services, personal services).
Firms that run a high turnover policy particularly harm low wage/skill workers, because the damage to them in terms of getting another job, wage loss and hours loss from losing their job is greater than for more skilled workers.
Some recent formal search models incorporate heterogeneity among both workers and employers in identifying the rational maximising equilibrium. Bowlus, Keifer and Neumann (1995, 1997) allow productivity among otherwise similar employers to vary across a small number of employer types. One conclusion from their simulations (based on US parameters) is that the reason that the earnings distribution of young whites entering the labour market from school is higher than for blacks is not because whites get more or different job offers, but because the jobs that blacks get are twice as likely to disappear from under them. The empirical evidence is strong that involuntary job change is linked with (probably causes) reduced wages.
Bontemps Robin and Van den Berg (1997), using French data, also permit the productivity of different employers to vary. They conclude that the most productive employers have substantial monopsony power and use it to pay wages well below marginal product. The least productive employers have little monopsony power and only normal profit and are forced to pay approximately marginal product. The former result implies that wage regulation that increases wages above that set by the monopsonists, but not above marginal product, would both raise wages and raise employment (using the well-known result of the monopsony model of labour demand, in which mandated (but not market-determined) increases in the wage can have the effect of both increasing the wage and increasing employment).
There is an important conclusion from this body of research for the role of low wage jobs. Low wage jobs mostly provide relatively little training and are offered by low productivity firms. The greatest chance of upward mobility for a relatively low skill worker is to get a job with a high productivity firm that is paying relatively high wages (hence faces relatively low quit rates). As a result of the low quit rates, this firm will be prepared to pay for skills development of its workers, and hence provide the conditions for upward wage mobility. But this works only if there are also lower wage jobs out there, since it is the higher relative wage of the high productivity firm that induces the lower quit rate. If higher wages at the bottom were mandated, then they may reduce quits to leave the labour force, but not quits to go to a better job. Hence there would be some expectation of greater employer investment in skills development, but not as great as for the same wage seen as part of a distribution, with sizeable numbers of jobs offering less.
