While it is well established that both promotions within firms and mobility across firms lead to substantial earnings progression, few studies offer an integrated analysis of the effects of these two types of mobility on earnings growth. To do this, we exploit a large Danish panel data set and techniques from the literature on earnings dynamics. Furthermore, linked measures of income taxation - a unique feature of our data - allow us to estimate whether the effects of mobility on gross income growth carry over to net income. We show that vertical mobility, either within or across firms, and not horizontal mobility across firms is what ultimately matters for gross earnings growth. However, because of progressive taxation, we do not see any effects of vertical mobility on net earnings growth. Instead, the fruits of promotions are enjoyed in the form of tax shields such as future consumption via tax deductable pension contributions and more expensive real estate or financed consumption where interest is tax deductable.
Main Research Area:
9th IZA/SOLE Transatlantic Meeting of Labor Economists, 2010