Job-to-Job Transitions, Sorting, and Wage Growth

In this paper we measure the relative contribution of firm effects and match quality to wage growth experienced by workers moving between jobs. We provide evidence that firm effects only explain a small share of the observed wage dynamics. We also show that standard assumptions on match quality used to estimate fixed-effect wage models are not well supported in Danish data. We propose an alternative strategy to estimate an additive model of wage changes that includes a freely-varying match effect for all but a subset of job changers. Using estimates from Danish linked worker-firm data, we find that 44% of the wage growth experienced by job-to-job movers is attributable to an improvement in the quality of the worker-firm match, and 66% of the variance of wage growth is explained by the variance of the change in match effects.