The Wage Response to Shocks: The Role of Inter-Occupational Labor Adjustment

Abstract
How does a region's average wage adjust to a shock, say trade-induced or technology-induced,on labor demand? Beaudry, Green and Sand (2010) recently demonstrated the inaccuracy of thetraditionally-used shift-share analysis - a partial equilibrium exercise - in addressing this question.While they focus on shifts in the industrial composition of employment, I argue that the interplaybetween inter-sectoral and inter-occupational labor adjustments is fundamental in assessing thespillover effects they emphasize. I extend their search-and-bargaining model to incorporateoccupations and illustrate why omitting inter-occupational labor adjustments could lead tounderestimation. Using German individual-level data for 1977-2001, I estimate that omitting thisdimension creates a substantial and statistically significant negative bias representing two-thirds ofthe total effect.