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Returns to Tenure or Seniority?

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  • Sebastian Buhai
  • Miguel Portela
  • Coenraad N. Teulings
  • Aico Van Vuuren

Abstract

This study documents two empirical regularities, using data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm (Last In, First Out; LIFO). Second, workers’ wages rise with seniority (= a worker’s tenure relative to the tenure of her colleagues). We seek to explain these regularities by developing a dynamic model of the firm with stochastic product demand and hiring cost (= irreversible specific investments). There is wage bargaining between a worker and its firm. Separations (quits or layoffs) obey the LIFO rule and bargaining is efficient (a zero surplus at the moment of separation). The LIFO rule provides a stronger bargaining position for senior workers, leading to a return to seniority in wages. Efficiency in hiring requires the workers’ bargaining power to be in line with their share in the cost of specific investment, Then, the LIFO rule is a way to protect their property right on the specific investment. We consider the effects of Employment Protection Legislation and risk aversion.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2381.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2381

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Keywords: irreversible investment; efficient bargaining; seniority; LIFO; matched employer-employee data; EPL;

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References

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  1. Moshe Buchinsky & Denis Foug�re & Francis Kramarz & Rusty Tchernis, 2010. "Interfirm Mobility, Wages and the Returns to Seniority and Experience in the United States," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 972-1001.
  2. Buhai, Ioan Sebastian & Teulings, Coen N, 2006. "Tenure Profiles and Efficient Separation in a Stochastic Productivity Model," CEPR Discussion Papers 5577, C.E.P.R. Discussion Papers.
  3. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  4. Christian Dustmann & Costas Meghir, 1999. "Wages, experience and seniority," IFS Working Papers W99/01, Institute for Fiscal Studies.
  5. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
  6. Joseph G. Altonji & Robert A. Shakotko, 1985. "Do Wages Rise With Job Seniority?," NBER Working Papers 1616, National Bureau of Economic Research, Inc.
  7. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  8. Joseph G. Altonji & Nicolas Williams, 1997. "Do Wages Rise with Job Seniority? A Reassessment," NBER Working Papers 6010, National Bureau of Economic Research, Inc.
  9. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  10. Peter Kuhn & Jacques Robert, 1988. "Seniority and Distribution in a Two-Worker Trade Union," Working Papers 615, Princeton University, Department of Economics, Industrial Relations Section..
  11. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, 01.
  12. Topel, Robert H & Ward, Michael P, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 439-79, May.
  13. Bertrand, Marianne & Mullainathan, Sendhil, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Scholarly Articles 3429713, Harvard University Department of Economics.
  14. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  15. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  16. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
  17. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  18. Kuhn, Peter, 1988. "A Nonuniform Pricing Model of Union Wages and Employment," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 473-508, June.
  19. Neal, Derek, 1995. "Industry-Specific Human Capital: Evidence from Displaced Workers," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 653-77, October.
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Citations

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Cited by:
  1. Lans Bovenberg & Coen Teulings, 2008. "Rhineland exit," CPB Discussion Paper 101, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Fernando Alexandre & Miguel Portela & Carla Sá, 2008. "Admission conditions and graduates' employability," NIPE Working Papers 16/2008, NIPE - Universidade do Minho.
  3. Elena Cottini & Paolo Ghinetti, 2012. "Working Conditions, Lifestyles and Health," Economics Working Papers 2012-28, School of Economics and Management, University of Aarhus.
  4. Anja Deelen, 2011. "Wage-Tenure Profiles and Mobility," CPB Discussion Paper 198, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Coen Teulings, 2010. "How to Share Our Risks Efficiently? Principles for Optimal Social Insurance and Pension Provision," De Economist, Springer, vol. 158(1), pages 1-21, April.
  6. Natália P. Monteiro & Paulo Bastos, 2009. "Managers and wage policies," NIPE Working Papers 2/2009, NIPE - Universidade do Minho.
  7. von Below, David & Thoursie, Peter, 2008. "Last in, first out? Estimating the effect of seniority rules in Sweden," Working Paper Series 2008:27, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  8. Anja Deelen, 2012. "Wage-Tenure Profiles and Mobility," De Economist, Springer, vol. 160(2), pages 141-155, June.

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