Attila Gyetvai, Bank of Portugal

"The Option Value of Occupations"

Abstract

The value of a job lies not only in the wage and amenities it pays, but also in the future opportunities it enables. This paper quantifies the value of such opportunities - the option value - associated with occupations. I develop a model of job mobility which parses the flow and option value of occupations: the flow value arises from compensating differentials whereas the option value is comprised of occupational wage promotions, job offer arrival rates, wage offers, and nonpecuniary job switching costs. I estimate the structural model on linked Hungarian administrative data and use it to quantify the relative importance of each of these mechanisms. High-skill occupations offer higher wages and more stable employment; in turn, low-skill occupations feature higher nonwage amenities but larger nonpecuniary costs of switching to high-skill jobs. As a result, workers who start their careers in a high-skill occupation in the bottom 10 percent of wages surpass those who start in a low-skill occupation in the top 5 percent of wages in 5 years. I find that occupational labor market frictions are the key ingredients to the option value of occupations.

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