Latent Worker Dynamics and Wage Changes

Thomas M. Menino Convention & Exhibition Center 

This paper investigates the effects of latent worker heterogeneity on wage changes among
new hires. We uncover latent labor market states and unobserved worker types by estimating
a multi-channel latent Markov model, using individual histories of labor force status and job
switches under various circumstances from the Survey of Income and Program Participation.
We identify latent labor-market states that are highly transient, typically experienced by
workers with unstable employment who frequently switch jobs. Individuals who encounter
these transient states within a one-year interval are classified as the vulnerable type, while
all others are classified as the stable type. The vulnerable type, representing 20 percent
of the civilian population, does not experience wage gains when switching jobs and faces
countercyclical wages at new jobs, in contrast to typical job switchers who experience wage
gains and acyclical wage changes. Long tenure among vulnerable workers further reduces
wage gains at new jobs and amplifies the countercyclicality of their wages, likely reflecting
the destruction of job-specific human capital and greater mismatch. We interpret these
empirical findings through a search-and-matching model in which heterogeneity among
workers and jobs accounts for the excess cyclicality in the wages of new hires.

Latent Markov Model

Worker Heterogeneity

Survey of Income and Program Participation