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Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

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Author Info

  • Buhai, Sebastian

    ()
    (Department of Economics, Aarhus School of Business)

  • Teulings, Coen

    (SEO Economic Research)

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 University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 05-9.

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Length: 43 pages
Date of creation: 20 Oct 2005
Date of revision: 03 Oct 2006
Handle: RePEc:hhs:aareco:2005_009

Note: Rev. version
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Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 486396
Fax: +45 8615 5175
Web page: http://www.asb.dk/departments/nat.aspx
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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. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  2. 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.
  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?," Working Papers 08-1, University of Aarhus, Aarhus School of Business, Department of Economics.
  3. Julien Prat, 2006. "The Rate of Learning-by-Doing: Estimates from a Search-Matching Model," 2006 Meeting Papers 647, Society for Economic Dynamics.
  4. 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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