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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. Coen N. Teulings & Martin A. van der Ende, 2000. "A Structural Model of Tenure and Specific Investments," Tinbergen Institute Discussion Papers 00-009/3, Tinbergen Institute, revised 30 Nov 2002.
  2. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-76, February.
  3. Robert H. Topel & Michael P. Ward, 1988. "Job Mobility and the Careers of Young Men," NBER Working Papers 2649, National Bureau of Economic Research, Inc.
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Cited by:
  1. Coen Teulings & Pieter A. Gautier, 2011. "Sorting and the output loss due to search frictions," 2011 Meeting Papers 169, Society for Economic Dynamics.
  2. Buhai, Sebastian & Portela, Miguel & Teulings, Coen & van Vuuren, Aico, 2008. "Returns to Tenure or Seniority?," IZA Discussion Papers 3302, Institute for the Study of Labor (IZA).
  3. Julien Prat, 2010. "The rate of learning-by-doing: estimates from a search-matching model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(6), pages 929-962.
  4. Altavilla, Carlo & De Grauwe, Paul, 2010. "Forecasting and combining competing models of exchange rate determination," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/234426, Katholieke Universiteit Leuven.
  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.

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