A Theory of Wage and Promotion Dynamics Inside Firms

Abstract

We show that a framework that integrates job assignment, human-capital acquisition, and learning captures several empirical findings concerning wage and promotion dynamics inside firms, including the following. First, real-wage decreases are not rare but demotions are. Second, wage increases are serially correlated. Third, promotions are associated with large wage increases. Fourth, wage increases at promotion are small relative to the difference between average wages across levels of the job ladder. Fifth, workers who receive large wage increases early in their stay at one level of the job ladder are promoted quickly to the next.