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Returns to Tenure or Seniority?

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  • Buhai, Ioan Sebastian
  • Portela, Miguel
  • Teulings, Coen N
  • van Vuuren, Aico

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6933.

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Date of creation: Aug 2008
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Handle: RePEc:cpr:ceprdp:6933

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

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References

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  1. Sebastian Buhai & Coen N. Teulings, 2013. "Tenure Profiles and Efficient Separation in a Stochastic Productivity Model," Discussion Papers 7, Central European Labour Studies Institute (CELSI).
  2. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, 01.
  3. Joseph G. Altonji & Nicolas Williams, 2005. "Do wages rise with job seniority? A reassessment," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(3), pages 370-397, April.
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  8. Joseph G. Altonji & Robert A. Shakotko, 1985. "Do Wages Rise With Job Seniority?," NBER Working Papers 1616, National Bureau of Economic Research, Inc.
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  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. 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.
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  14. 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.
  15. Bertrand, Marianne & Mullainathan, Sendhil, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Scholarly Articles 3429713, Harvard University Department of Economics.
  16. 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.
  17. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  18. 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.
  19. 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.
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Citations

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Cited by:
  1. Anja Deelen, 2012. "Wage-Tenure Profiles and Mobility," De Economist, Springer, vol. 160(2), pages 141-155, June.
  2. Natália P. Monteiro & Paulo Bastos, 2009. "Managers and wage policies," NIPE Working Papers 2/2009, 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. 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.
  5. Bovenberg, A Lans & Teulings, Coen N, 2008. "Rhineland exit?," CEPR Discussion Papers 6936, C.E.P.R. Discussion Papers.
  6. Alexandre, Fernando & Portela, Miguel & Sá, Carla, 2008. "Admission Conditions and Graduates' Employability," IZA Discussion Papers 3530, Institute for the Study of Labor (IZA).
  7. 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.
  8. Anja Deelen, 2011. "Wage-Tenure Profiles and Mobility," CPB Discussion Paper 198, CPB Netherlands Bureau for Economic Policy Analysis.

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