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Unobserved Individual and Firm Heterogeneity in Wage and Tenure Functions: Evidence from German Linked Employer-Employee Data

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  • Cornelissen, Thomas

    ()
    (University College London)

  • Hübler, Olaf

    ()
    (Leibniz University of Hannover)

Abstract

We estimate wage and job tenure functions that include individual and firm effects capturing time-invariant unobserved worker and firm heterogeneity using German linked employer-employee data (LIAB data set). We find that both types of heterogeneity are correlated to the observed characteristics and that it is therefore warranted to include individual and firm fixed effects in both the wage and the job tenure equation. We look into the correlation of the unobserved heterogeneity components with each other. We find that high-wage workers tend to be low-tenure workers, i.e. higher unobserved ability seems to be associated with higher job mobility. At firm level, there seems to be a trade-off between wages and job stability: High-wage firms tend to be low-tenure firms, which suggests that low job stability may be compensated by higher wages. High-wage workers seem to sort into low-wage/high-tenure firms. They seem to forgo some of their earnings potential in favour of higher job stability.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2741.

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Length: 42 pages
Date of creation: Apr 2007
Date of revision:
Publication status: published in: German Economic Review, 2011, 12 (4), 469-489
Handle: RePEc:iza:izadps:dp2741

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Keywords: wages; unobserved worker and firm heterogeneity; linked employer-employee data; tenure;

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References

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Citations

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Cited by:
  1. Carl Davidson & Fredrik Heyman & Steven Matusz, & Fredrik Sjoholm & Susan Zhu, . "Globalization and Imperfect Labor Market Sorting," Discussion Papers 10/30, University of Nottingham, GEP.
  2. Bellmann, Lutz & Cornelißen, Thomas & Hübler, Olaf & Pahnke, André, 2008. "Betriebliche Reorganisation, Entlohnung und Beschäftigungsstabilität (Organisational change, wages and job stability)," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 41(2/3), pages 259-285.
  3. repec:iab:iabzaf:v:41:i:2/3:p:259-285 is not listed on IDEAS
  4. Paulo Bastos & Natália P. Monteiro, 2011. "Managers and Wage Policies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 957-984, December.

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