Job Separations, Heterogeneity, and Earnings Inequality

Changes in the fraction of workers experiencing job separations can account for most of the increase in earnings dispersion that occurred both between, as well as within educational groups in the United States from the mid-1970s to the mid-1980s. This is not true of changes in average earnings losses following job separations. A search model with exogenous human capital accumulation calibrated to match some selected moments of the U.S. labor market is used to measure the effects of changes in the fraction of workers experiencing job separations (extensive margin) versus changes in average earnings losses following job separations (intensive margin). While both margins do well in accounting for the increase in the college premium, only the changes in the extensive margin do well in accounting for the increases in the variance of both the permanent and transitory components of earnings.