Wage-tenure Profiles Research Articles

The relative importance of portable and non-portable agglomeration effects for the urban wage premium

Using administrative data for West Germany, we study the relative importance of portable and non-portable agglomeration effects for the urban wage premium. In doing so, we advance the established strategy of estimating wage-tenure profiles for urban-rural and rural-urban movers by adding worker, firm, and match fixed effects. This allows us to distinguish unambiguously between both types of agglomeration effects. Our results show that portable and non-portable agglomeration effects equally contribute to the urban wage premium. Moreover, portable agglomeration effects are not only observed in the biggest cities. Instead, the speed of human capital accumulation continuously increases with city size.

Labor Market Dynamics and Development

We build a dataset of harmonized rotating panel labor force surveys covering 42 countries across a wide range of development and document three new empirical findings on labor market dynamics. First, labor market flows (job-finding rates, employment-exit rates, and job-to-job transition rates) are two to three times higher in the poorest as compared with the richest countries. Second, employment hazards in poorer countries decline more sharply with tenure; much of their high turnover can be attributed to high separation rates among workers with low tenure. Third, wage-tenure profiles are much steeper in poorer countries, despite the fact that wage-experience profiles are flatter. We show that these facts are consistent with theories with endogenous separation, particularly job ladder and learning models. We disaggregate our results and investigate possible driving forces that may explain why separation operates differently in rich and poor countries.

Firm age and wage determination: evidence from matched employer–employee data in Japan

ABSTRACT Firm age, a new factor underlying wage differentials, has been analysed in the emerging literature using matched employer–employee data, though its effect on wages remains inconclusive. This study adds to the literature by providing insights into different wage determinants between industries. We find firm age has a negative effect on wages and a positive effect on a slope of the wage–tenure profile, particularly in non-manufacturing industries. The industrial difference may be explained by the difference in firms’ survival rates and expectations on long-term training.

Paid to Quit

Inspired by a recent observation about an online retail company, this paper explains why a firm may find it optimal to offer an exit bonus to recent hires so as to induce self-selection. We study a double adverse selection problem, in which the principal can neither observe agents’ commitment to the job nor their intrinsic motivation. A steep wage-tenure profile deters uncommitted agents from applying. An exit bonus can stimulate that—among the committed agents—those who discovered that they are not intrinsically motivated for the job discontinue employment with the principal. Our key findings are that offering an exit bonus increases profits when the first adverse selection problem is sufficiently severe compared to the second and that the exit bonus needs to come as a surprise for the agents in order to function well.

Internal Labor Markets in Equilibrium

Traditional models of promotion have difficulty explaining why many firms do not favor internal employees for advancement. I develop a new model to explain this phenomenon. My model generates an equilibrium where some, but not all, ex ante identical firms recruit strictly internally. These firms employ higher quality entry-level workers, since they hire supervisors exclusively from their lower ranks. The scarcity of high-quality workers limits the use of this strategy. I derive several testable predictions on wage-tenure profile differences across firms with varying recruitment practices and confirm these predictions using matched employer-employee data from the United Kingdom.

DYNAMIC CONTRACTS WITH WORKER MOBILITY VIA DIRECTED ON‐THE‐JOB SEARCH

This article proposes a model with dynamic incentive contracts and on‐the‐job search in a frictional labor market. The optimal long‐term contract exhibits an increasing wage–tenure profile. With increasing wages, worker effort also increases with tenure. These two features imply that the probabilities of both voluntary and involuntary job separation decrease with both job tenure and the duration of employment. Given these results, workers experience differing labor market transitions—between employment, unemployment, and across different employers—and the equilibrium generates endogenous heterogeneity among ex ante homogeneous workers.

Paid to Quit

Inspired by a recent observation about an online retail company, this paper explains why a firm may find it optimal to offer an exit bonus to recent hires so as to induce self-selection. We study a double adverse selection problem, in which the principal can neither observe agents’ commitment to the job nor their intrinsic motivation. A steep wage-tenure profile deters uncommitted agents from applying. An exit bonus can stimulate that –among the committed agents– those who discovered that they are not intrinsically motivated for the job discontinue employment with the principal. Our key findings are that offering an exit bonus increases profits when the first adverse selection problem is sufficiently severe compared to the second and that the exit bonus needs to come as a surprise for the agents in order to function well.

A Note on Dual Internal Labor Markets and Wages of Temporary Workers: Evidence from Linked-Employer-Employee Data

I use linked employer-employee data from the German Federal Statistical Office to estimate within-firm wage differentials between temporary workers with fixed-term contracts and workers with permanent contracts in the context of dual internal labor markets. Wage-tenure profiles of permanent workers are estimated separately for each firm to obtain a proxy for the prevalence of internal labor markets. Temporary workers earn significantly lower wages in firms with steeper wage-tenure profiles. This finding is consistent with the segmentation in a primary permanent workforce with high wages and a secondary temporary workforce with low wages, if internal labor markets are more prevalent.

Paid to Quit

Inspired by a recent observation about an online retail company, this paper explains why a firm may find it optimal to offer an exit bonus to recent hires so as to induce self-selection. We study a double adverse selection problem, in which the principal can neither observe agents’ commitment to the job nor their intrinsic motivation. A steep wage-tenure profile deters uncommitted agents from applying. An exit bonus can stimulate that – among the committed agents – those who discovered that they are not intrinsically motivated for the job discontinue employment with the principal. Our key findings are that offering an exit bonus increases profits when the first adverse selection problem is sufficiently severe compared to the second and that the exit bonus needs to come as a surprise for the agents in order to function well.

Adjustments of wage-tenure profiles with respect to entry age

This paper adds a new empirical finding of the impact of workers’ entry age on wage-tenure profiles to the literature, which might be explained by human capital and deferred compensation models. I analyze two different data sets stemming from personnel records of a large German company and from German linked employer-employee data. The analyzed company employs a quite large share of older workers but does not hire many older workers. Estimated earnings functions indicate that wage-tenure profiles are adjusted with respect to entry age: workers with older entry age earn higher entry wages and have lower wage growths than younger workers. The linked employer-employee data confirm the findings from personnel records as most firms pay higher entry wages and flatter wage-tenure profiles to older new entrants. The personnel data set and the linked employer-employee data set have their advantages and disadvantages so that an analysis of both enhances the credibility of the main results.

Credit within the Firm

We exploit time variation in the degree of development of local credit markets and matched employer-employee data to assess the role of the firm as an internal credit market. In less developed local credit markets firms can offer a flatter wage-tenure profile than firms in more developed credit markets to lend implicitly to their workers or offer a steeper profile to implicitly borrow from their workers. We find that firms located in less financially developed markets offer wages that are lower at the beginning of tenure and grow faster than those offered by firms in more financially developed markets, helping firms finance their operations by raising funds from workers. Because we control for local market effects and only exploit time variation in the degree of local financial development induced by an exogenous liberalization, the effect we find is unlikely to reflect unobserved local factors that systematically affect wage tenure profiles. The size of implicit loans is larger for firms with more problematic access to bank credit and workers less likely to face credit constraints. The amount of credit generated by implicit lending within the firm is economically important and can be as large as 30% of bank lending. Consistent with credit market imperfections opening up trade opportunities within the firm, we find that the internal rate of return of implicit loans lies between the rate at which workers savings are remunerated in the market and the rate firms pay on their loans from banks.

Wage-Tenure Profiles and Mobility

The Dutch labour market is characterized by low job mobility and high average duration of unemployment for older jobseekers. This study investigates the role of wage-tenure profiles in explaining patterns of job mobility. Based on a large administrative database, the estimates show that wage-tenure profiles in the Netherlands are relatively steep. Furthermore, industries with high returns to tenure appear to have a high share of older workers, as well as high average job tenure. This implies that steep wage-tenure profiles are related to low levels of mobility.

Internal Labor Markets in Equilibrium

Traditional models of promotion have difficulty explaining why many firms do not favor internal employees for advancement. I develop a new model to explain this phenomenon. My model generates an equilibrium where some, but not all, ex ante identical firms recruit strictly internally. These firms employ higher quality entry-level workers, since they hire supervisors exclusively from their lower ranks. The scarcity of high-quality workers limits the use of this strategy. I derive several testable predictions on wage-tenure profile differences across firms with varying recruitment practices and confirm these predictions using matched employer-employee data from the United Kingdom.

Training, Technological Changes, and Displacement

By matching industry/occupation data on training to displaced worker data from the Current Population Surveys, this paper analyzes why many older workers were displaced by technological changes in the 1990s, and why these workers incurred large earnings losses. When technological changes depreciate the existing stock of firm-specific human capital, older workers who receive higher wages from the sharing arrangement of the returns to investment in firm-specific human capital are dismissed as firms find it unprofitable to retain them. These displaced workers have higher predisplacement wages with steeper wage-tenure profiles, and hence incur larger earnings losses after displacement than other displaced workers.

Tenure, Wage Profiles and Monitoring

Efficiency wage theory predicts that firms can induce worker effort by the carrot of high wages and / or the stick of monitoring worker performance. Another option available to firms is to tilt the remuneration package over time such that the lure of high future earnings acts as a deterrent to current shirking. In this paper we undertake the first empirical investigation of this relationship between the slope of the wage-tenure profile and the level of monitoring. On the assumption that firms strive for the optimal trade-off between these various instruments, we hypothesise that increased monitoring leads to a decline in the slope of the wage-tenure profile. Our empirical analysis, using two cross sections of matched employer-employee British data, provides robust support for this prediction.

Recall bias in the displaced workers survey: Are layoffs really lemons?

This paper examines how the extent of recall bias in the Displaced Workers Surveys affects the often-cited empirical results found by Gibbons and Katz [Gibbons, R., Katz, L.F., 1991. Layoffs and lemons. Journal of Labor Economics 9 (4), 351−380] for the lemons effect of layoffs. Their finding that workers displaced by layoffs experience larger wage losses than do those displaced by plant closings is not due to the stigma attached to the layoff events. Rather it partly stems from recall bias in the 1984 and 1986 DWS, but mostly reflects the fact that workers displaced by layoffs have significantly higher predisplacement wage-tenure profiles than do those displaced by plant closings, while there is no such difference in postdisplacement wage-tenure profiles. A similar analysis using the 2000 and 2002 DWS shows that predisplacement wage losses are not different between workers displaced by layoffs and those displaced by plant closings.

Industry-specific human capital and the wage profile: Evidence from Taiwan

Using data from Taiwan's Manpower Utilization Survey (1979–2000), this paper finds evidence that supports the industry-specific human capital effect on wage tenure profiles. Work experience is used as an indirect measure for testing industry-specific human capital by comparing the effect between stayers and movers. Other things being equal and holding firm tenure constant, movers actually incur a wage loss measured by the wage premium of the work experience. However, a greater than average firm tenure effect, especially for movers in the voluntary group, reflects an underlying job-related matching process. We also find that the effect of work experience declines with education, while the effect of industry-specific human capital increases with education. JEL no. J24, J31, J41, J62.

The economics of ‘new blood’

We construct a dynamic general-equilibrium model of search and matching where public knowledge grows through time and workers accumulate a fraction of this knowledge through education/retraining. Due to search delays, the unemployment pool is populated by vintages of workers of differing productivities. Through intergenerational rivalry, the human capital of older generations is rendered obsolete relative to that of the new blood. Higher knowledge growth exacerbates intergenerational competition, thereby lowering education and growth while raising unemployment and inequality. These findings help explain wage compression/expansion and the hump-shaped wage-tenure profile across cohorts.

Returns to Seniority among Public School Teachers

Returns to seniority account for a substantial share of public K-12 expenditures. Over the first ten to 15 years of a career, public school teachers enjoy average wage growth at least equivalent to that of other white-collar workers. Explanations for this structure in terms of human capital or costly monitoring lack theoretical and empirical support. A steeper wage-tenure profile reduces turnover, but it is doubtful that the costs of turnover are high enough to make this an optimal use of school resources. We conclude that the structure of teacher pay in public education is more consistent with rent-seeking than efficient contracting.

Individual Heterogeneity, Job Matching, and Returns to Tenure in Germany

Abstract Data from the German Socio-Economic Panel are used to examine the roles of individual heterogeneity and job match quality in generating commonly observed wagetenure profiles. The evidence presented in the paper indicates that once those factors are reflected in the estimations, the returns to seniority are no longer measurable. Job match quality appears to be the dominant factor in the German labor market in generating an upward sloping wage-tenure profile.