Are initial wage losses of intersectoral movers compensated for by their subsequent wage gains?

This paper presents an equilibrium explanation of the inter- and intrasectoral mobility of workers. Analyses of our samples from the Panel Study of Income Dynamics and the National Longitudinal Survey of Youth show that, other things being equal, the initial wage decline is greater for intersectoral movers than for intrasectoral movers. Intersectoral movers, however, enjoy higher wage growth in subsequent years on postunemployment jobs than intrasectoral movers do, and hence are compensated for their initial wage decline. Our estimates suggest that, other things being constant, the additional short-term wage loss associated with sector shifts is overturned in no more than four years by the greater wage growth of intersectoral movers in subsequent years. The findings in the current study clearly show that the true economic costs of intersector mobility tend to be overstated in existing studies and are significantly lowered in the long-term perspective. Calibration of a simple lifetime utility model demonstrates that inter- and intrasectoral movements of workers are quantitatively consistent with an equilibrium framework, at least for a major group of workers who move with longer term perspectives. Evidence also shows that job seekers consider not only the initial wage rate but also the subsequent wages received from the postunemployment job when deciding whether to recommence employment or switch sectors.