Job‐to‐Job Transitions: Wage Cuts and Wage Growth. Evidence for a Developing Economy

ABSTRACT In this paper, I study which is the trade‐off that workers face when accepting a wage cut after a job‐to‐job (JTJ) transition. Using data from the Chilean Unemployment Insurance (UI) registry, I show that JTJ transitions are positively associated with ex‐post wage growth. Besides, conditional on a JTJ transition, workers who accept wage cuts show higher wage growth rates in their destination firms. I rationalize these findings in a parsimonious job search model that features exogenous wage‐wage growth offers. Workers maximize the expected present value of moving JTJ or staying in their current firm when a job offer arrives. The model is calibrated in order to replicate most stylized facts documented in the empirical section and, through comparative statics exercises, the model highlights the relevance of the layoff probability, the correlation of wage levels and growth rates within a job offer, the value of unemployment and the offered ‐ratio in explaining some of the observed labor market and wage dynamics. The evidence that I provide suggests that, even though a JTJ transition implies a wage cut, workers may also enjoy higher continuation values in their new job.