Why some jobs pay more than others: The key

role of job titles

Ioana Marinescu, Ronald Wolthoff

06 November 2016

One of the fundamental questions in labour economics is why some workers are paid
more than others within the same industry. This column uses data from adverts on a
large US job website to investigate what's behind these wage differences. The job titles
used in adverts capture more variation between jobs than standard occupational
classifications. By failing to recognise this, the previous literature has attributed too
much of wage inequality to luck and too little to differences in worker and firm
characteristics

Most modern labour markets exhibit a substantial degree of wage inequality (e.g.
Mortensen 2003, Horstein et al. 2007). One of the fundamental questions in
labour economics is understanding the sources of this inequality. Why are some
workers paid more than others? Do wage differences reflect meaningful
differences in worker and firm characteristics (such as occupation, the workers
education level or the firms sector of industry)? Or are wage differences the
result of sheer luck in getting the right job? The literature in this area finds that
worker and firm characteristics explain at most half of the variation in wages
across workers (e.g. Abowd et al. 1999). This suggests that luck plays an
important role.
In a recent study, we shed new light on this question by analysing job adverts on
the large US employment website CareerBuilder.com (Marinescu and Wolthoff
2016). A big advantage of these data compared to traditional data sources is that
they contain the job titles that firms choose to describe their positions, such as
Java programmer. We document that these job titles contain a lot of relevant
information. In particular, the job titles are much more detailed than standard
occupational classifications in describing differences in the required experience
or area of specialisation, distinguishing between senior and junior accountants,
or between Java and C++ programmers. We demonstrate that this information is
crucially important. Unlike standard occupational classifications, job titles explain
nearly all of the wage variation across job openings; with the job title in hand, we
can guess very accurately how much a job pays. Therefore, a job seeker cannot
count on luck to find a high-wage job high-wage jobs are just different types of
jobs.

Wage variance
Our data set includes all job ads on CareerBuilder for the Chicago and
Washington, DC areas in January 2011. Only approximately 20% of these job
ads include information on the wage that the firm plans to pay.
This fact may raise the question of whether the posted wages are representative
of the wages that are earned in the US labour market more broadly. We establish
that this is the case by showing that the distribution of posted wages does not
systematically differ from the distribution of earned wages in representative data
sets such as the Current Population Survey (CPS). One of the dimensions in
which the wages in the two data sets are strikingly similar is the explanatory
power of occupations as captured by the Standard Occupational Classification
(SOC). In both data sets, the finest version of this classification can account for
just under half of the wage variation.
While no finer occupational information is available in the CPS, the CareerBuilder
data allow us to use job titles instead. It turns out that the explanatory power of
job titles greatly exceeds that of SOC codes job titles explain more than 94% of
the cross-sectional wage variation. An alternative way to assess the importance
of job titles is to first analyse to what extent the identity of the firm can explain
wages, i.e. whether some firms systematically pay more than others. We find that
there are large differences in pay across firms, and that firms that pay higher
wages than other firms primarily do so because they employ workers with
different job titles.

The power of words

To better understand these results, we analyse which words in the job title are
particularly important. We identify two different groups.

First, we find that words that indicate a level of seniority within an

occupation are important: not surprisingly, job titles that include words like
manager, senior, executive or director pay significantly higher wages
than job titles with words like coordinator, assistant, entry or junior.
Second, words that indicate particular areas of specialization have
significant explanatory power as well: for example, sales, engineer,
consultant or java are associated with higher wages, while accountant,
marketing, recruiting or network indicate lower wages.

One concern in interpreting these results is that firms might choose certain job
titles to justify paying a higher or a lower wage. That is, perhaps senior
accountant and a junior accountant positions are fundamentally the same,
except for their wages. We show that this concern is unfounded by analysing
workers application behaviour. The argument is as follows. If these positions
only differ in their wages, then we would expect two things. First, applicants to
either position should be similar in terms of their characteristics. Second, the
position offering the higher wage i.e. the senior accountant position should
attract more applicants because it pays more.
Neither implication holds in our data. The characteristics of applicants differ
across job titles within an occupation, with manager, senior, executive, or
director positions attracting more experienced applicants. Moreover, the
association between wages and the number of applicants is negative within an
occupation. This latter fact may seem somewhat surprising at first sight, but it is
consistent with the findings of a small literature that tries to establish the effect of
a firms wage offer on its number of applications. Our data reveal that there is an
intuitive reason for these results: we find that job titles with words like manager,
senior, executive or director pay higher wages but attract fewer applicants,
while words like coordinator, assistant, entry or junior pay lower wages but
attract more applicants (see Figures 1 and 2). Hence, different job titles within the
same occupation are in fact fundamentally different positions, and the relation
between wages and applicants should be considered within a job title.
Figure 1 Word cloud of the words in job titles that are associated with a lower
wage for a given occupation

Note: The size of a word represents its frequency; the shade represents the magnitude of the
effect, with a darker colour indicating a more negative effect on the wage.

Figure 2 Word cloud of the words in job titles that are associated with more
applicants for a given occupation

Note: The size of a word represents its frequency; the shade represents the magnitude of the
effect, with a darker colour indicating a more positive effect on the number of applicants.

Lessons learnt
Summarising, our results indicate that there exists more variation between jobs in
the US labour market than captured by even the finest level of SOC codes. By
failing to recognise this, the previous literature has attributed too much of the
wage inequality to luck and too little to meaningful differences in worker and firm
characteristics. We find that the role of luck in determining a workers wage is in
fact quite small. This has important implications for understanding the job search
behaviour of unemployed workers. For example, US labour market data indicate
that the average duration of unemployment is not very long (e.g. Shimer 2012).
This is somewhat puzzling if one believes that luck plays an important role in the
determination of wages. Why do workers not search more for a better-paying
job? However, it is perfectly consistent with the idea that the role of luck is limited
continued job search is not that useful if most better-paying jobs are out of
reach because they require more experience or a different area of specialisation.

References
Abowd, J, F Kramarz and D Margolis (1999), High Wage Workers and High
Wage Firms,Econometrica 67(2), 251-333.
Hornstein, A, P Krusell and G Violante (2007), Frictional Wage Dispersion in
Search Models: A Quantitative Assessment, NBER Working Paper 13674.
Marinescu, I and R Wolthoff (2016), Opening the Black Box of the Matching
Function: The Power of Words, NBER Working paper 22508.
Mortensen, D (2003), Wage Dispersion: Why Are Similar Workers Paid
Differently? MIT Press, Cambridge, Massachusetts.
Shimer, R (2012), Reassessing the Ins and Outs of Unemployment, Review of
Economic Dynamics 15(2), 127-148