The False Illusion of Wage Cyclicality

Abstract

We show that cyclical variation in entry wages is driven by occupation mobility. To this end, we use Portuguese administrative data from 1986-2019 that accurately identifies occupation transitions between and within firms. We find that wages of new hires that remain in the same occupation are no more cyclical than those of stayers. By contrast, wages of workers switching occupations across and within firms are highly cyclical. Furthermore, we show that cyclicality increases, the more distinct the previous and current occupations are in terms of the required skills. Our results suggest that the standard framework in the literature conflates wage flexibility of new hires with cyclical changes in match quality associated with the worker’s occupation.

Keywords: wage cyclicality, occupational mobility, reallocation, match quality

JEL Classification: E32, J24, J64