Abstract
There is still no consensus on the causes of the increase in the variance of transitory earnings (earnings instability) in the United States. It is difficult to attribute the rise in instability to job mobility because there is no evidence of a concurrent increase in job turnover or separations. Using an error component model of the covariance structure of earnings on Panel Survey of Income Dynamics and Survey of Income and Program Participation data, this study shows that job mobility and the increase in the variance of wage changes upon job change accounts for a substantial part of the increase in earnings instability. The empirical evidence is consistent with the simulations 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 approximately constant. (JEL J21, J31)
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