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Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

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Author Info

  • Sebastian Buhai

    ()
    (Erasmus University Rotterdam, and Aarhus School of Business)

  • Coen N. Teulings

    ()
    (University of Amsterdam, and SEO)

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 with 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 Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-099/3.

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Date of creation: 21 Oct 2005
Date of revision: 03 Oct 2006
Handle: RePEc:dgr:uvatin:20050099

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Web page: http://www.tinbergen.nl

Related research

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

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References

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  1. 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.
  2. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  3. 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.
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Cited by:
  1. Gautier, Pieter A & Teulings, Coen N, 2011. "Sorting and the output loss due to search frictions," CEPR Discussion Papers 8257, C.E.P.R. Discussion Papers.
  2. Sebastian Buhai & Miguel Portela & Coen N. Teulings & Aico van Vuuren, 2008. "Returns to Tenure or Seniority?," Tinbergen Institute Discussion Papers 08-010/3, Tinbergen Institute.
  3. 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.
  4. Julien Prat, 2006. "The Rate of Learning-by-Doing: Estimates from a Search-Matching Model," 2006 Meeting Papers 647, Society for Economic Dynamics.

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