Wage Cuts as Investment in Future Wage Growth: Some Evidence
Wage cuts are often presumed to reflect an adverse change in economic constraints. However, several theoretical models have shown they can be a form of investment in future wage growth. This paper provides empirical evidence of the latter by explicitly modeling the worker's job choice when the job o¤er consists of both a starting wage and expected future wage growth. We use our analytical model to estimate the distribution of job o¤ers of less-educated workers. Roughly one-third of wage cuts experienced by these workers are transitions to jobs that have a higher value function than the existing job.
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