Returns to tenure, firm‐specific human capital and worker heterogeneity

Abstract

Workers with longer job tenure are paid more, on average, than those with shorter tenure. This paper re‐opens the debate about whether individual financial returns to tenure are due to firm‐specific human capital accumulation or sorting according to unobserved individual productivity heterogeneity. The paper constructs worker‐firm employment histories 1964‐1998 for all residents of Denmark and links this to wage and demographic information for all private sector workers 1980‐1998. All firm closures are observed, and following Kletzer we exploit these exogenous worker displacements from larger firms to distinguish between firm‐specific human capital and worker heterogeneity. Although the proportion of tenure returns due to firm‐specific human capital is smaller than that found in the USA, it has increased from 10 per cent in 1980 to 30 per cent in 1998 in Denmark. This change coincides with decentralisation of the wage bargaining process and may be explained by the increased freedom to write individual contracts.