The Wage Response to Shocks: The Role of Inter-Occupational Labour Adjustment ¬リニ

• This paper examines the role of industrial and occupational structure on wages • The commonly-used shift-share approach can be misleading • Search and bargaining effects are 2.8 times the effects predicted by shift-share • Accounting for occupational adjustments is important a b s t r a c t a r t i c l e i n f o How do cities' average wages adjust to a shock, e.g. trade-induced or technology-induced, shifting the industrial and/or occupational composition of employment? This question is commonly answered using a shift-share analysis , which imputes the effects of composition changes on cities' average wages in a purely mechanical way. This paper argues that a shift-share approach can be misleading if compositional shifts spill over into industrial and occupational wages. Using data on Germany, this paper finds that the spillover effects from a shift in industrial and occupational composition are large and imply a total effect on cities' average wages of 2.8 times the effect that is predicted by a shift-share exercise. In addition, results indicate that in the case of Germany, accounting for adjustments along the occupational mix is crucial to identify these spillovers, even if one is only interested in the effect of an industry-specific shock. A large body of literature documents changes in the wage structure in the U.S. and internationally over the last few decades. A well-known fact is that average wages have stagnated since 1970 and understanding why is an important issue. 1 One populist conjecture is that shifts in the industrial and occupational composition of jobs have contributed to poor labour market outcomes. In particular, many good jobs have been displaced due to technological change and rising globalization pressures, causing average wage growth to slow down as individuals shift employment from good into less desirable jobs. The notion of a good job refers to a job that pays more for the same level of human capital. The objective of this paper is to evaluate how one can best assess the role of changes in both industrial and occupational structure of employment on cities' average wages in Germany. The common approach to addressing this question is to perform a shift-share analysis, which is a purely mechanical way of imputing the effects of composition changes on cities' average wages. 2 In the case of a sectoral shift only, such an approach consists in multiplying each industrial wage premium in …