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Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

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  • Buhai, Ioan Sebastian
  • Teulings, Coen N

Abstract

This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. Starting point is the observation that within-job log wages for an individual can be described by random walk. We develop a theoretical model based on efficient bargaining, where both log outside wage and log wage in the current job follow a random walk. This setting allows the application of real option theory. We derive the efficient separation rule, which stipulates that workers switch jobs when the difference between the outside wage and the wage in the current job reaches a threshold. The model fits well the observed distribution of job tenures. Since we observe outside wages only at job start and job separation, our empirical analysis of within job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the efficient bargaining hypothesis. The model is estimated on the PSID.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5577.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5577

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Related research

Keywords: efficient bargaining; job tenure; option theory; random productivity growth; wage growth; wage-tenure profiles;

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References

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  1. Topel, Robert H & Ward, Michael P, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 439-79, May.
  2. Martin A. van der Ende & Coenraad N. Teulings, 2001. "A Structural Model of Tenure and Specific Investments," CESifo Working Paper Series 532, CESifo Group Munich.
  3. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 145-76, February.
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Cited by:
  1. Gautier, Pieter & Teulings, Coen, 2011. "Sorting and the Output Loss Due to Search Frictions," IZA Discussion Papers 5477, Institute for the Study of Labor (IZA).
  2. Sebastian Buhai & Miguel Portela & Coen Teulings & Aico van Vuuren, 2008. "Returns to Tenure or Seniority?," 2008 Meeting Papers 623, Society for Economic Dynamics.
  3. Julien Prat, 2010. "The rate of learning-by-doing: estimates from a search-matching model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(6), pages 929-962.
  4. Coen Teulings, 2010. "How to Share Our Risks Efficiently? Principles for Optimal Social Insurance and Pension Provision," De Economist, Springer, Springer, vol. 158(1), pages 1-21, April.

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