Occupational Mobility and Wage Inequality

GUEORGUI KAMBOUROV
University of Toronto
and
IOURII MANOVSKII
University of Pennsylvania

First version received August 2007; final version accepted June 2008 (Eds.)

In this article we argue that wage inequality and occupational mobility are intimately related. We
are motivated by our empirical findings that human capital is occupation specific and that the fraction
of workers switching occupations in the U.S. was as high as 16% a year in the early 1970’s and had
increased to 21% by the mid-1990’s. We develop a general equilibrium model with occupation-specific
human capital and heterogeneous experience levels within occupations.We find that the model, calibrated
to match the level of occupational mobility in the 1970’s, accounts quite well for the level of (withingroup)
wage inequality in that period. Next, we find that the model, calibrated to match the increase
in occupational mobility, accounts for over 90% of the increase in wage inequality between the 1970’s
and the 1990’s. The theory is also quantitatively consistent with the level and increase in the short-term
variability of earnings.