Abstract

In this paper we study the sources of wage growth. We identify the contribution to such growth of general, sector specific and firm specific human capital. Our results are interpretable within the context of a model where the returns to human capital may be heterogeneous and where firms may offer different combinations of entry level wages and firm specific human capital development. We allow for the possibility that wages are match specific and that workers move jobs as a result of identifying a better match. To estimate the average returns to experience, sector tenure and firm specific tenure within this context, we develop an identification strategy which relies on the use of firm closures. Our data source is a new and unique administrative data-set for Germany that includes complete work histories as well as individual characteristics. We find positive returns to experience and firm tenure for skilled workers. The returns to experience for unskilled workers are small and insignificant after 2 years of experience. Their returns to sector tenure are also zero. However, their returns to firm tenure are substantial. In this paper we study the growth of wages of young workers in Germany. Knowing the extent and reasons for individual wage growth over the life cycle is important for a number of areas in Economics. Just to mention two examples: first, it is a key element to understanding and designing active labour market programmes. Many such programmes offer temporary (and often subsidized) work opportunities. Examples are the New Deal in the U.K. and the Swedish programmes as well as a number of programmes in Germany. These programmes are based on the assumption that general skills are sufficiently enhanced while working, so as to render the workers employable without a wage subsidy. Thus the success of these programmes depends on how skills improve on the job for the target population, and whether this skill enhancement is transferable across jobs. Second, it is a key to understanding the benefits and costs of job mobility. This in turn matters for a number of policy issues, including the design of pension policies, relating for example to final salary schemes. As a result of this widespread interest, a large body of empirical research has focused on obtaining estimates for the returns of experience and seniority. 1 Our study uses a new and unique administrative data-set with a number of features that are important for our analysis and allow us to avoid many problems encountered in earlier work in this field. In our model wages grow due to learning by doing, which may be heterogeneous across individuals. Moreover, since firms offer different career profiles and because we allow for match specific effects on wages, investments take the form of searching for the firm with the most desirable learning by doing characteristics (career structure). 2

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