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Earnings Progression, Human Capital and Incentives: Theory and Evidence

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  • Frederiksen, Anders

    ()
    (Aarhus University)

Abstract

The career prospects of newly recruited employees differ substantially within an organization. The stars experience a considerable growth in earnings; others can hardly maintain their entry salaries. This article sheds light on the mechanisms generating the observed heterogeneity in earnings progression by investigating the effects of on-the-job human capital acquisition, explicit short-run incentives and career concern incentives on earnings progression. The model leads to predictions about the incentive structure and the progression in both cross-sectional and individual earnings which are supported by the empirical analysis based on personnel records from a large bank.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4863.

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Length: 26 pages
Date of creation: Apr 2010
Date of revision:
Publication status: published as 'Incentives and Earnings Growth' in: Journal of Economic Behavior and Organization, 2013, 85 (1), 97-107
Handle: RePEc:iza:izadps:dp4863

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Keywords: earnings dynamics; performance; career concern incentives; explicit incentives; personnel economics;

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References

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  1. Alexander K. Koch & Albrecht Morgenstern & Philippe Raab, 2009. "Career concerns incentives: An experimental test," Economics Working Papers, School of Economics and Management, University of Aarhus 2009-01, School of Economics and Management, University of Aarhus.
  2. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 468-505, June.
  3. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1321-1358, November.
  4. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 437-54, March.
  5. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  6. Lee A. Lillard & Robert J. Willis, 1976. "Dynamic Aspects of Earnings Mobility," NBER Working Papers 0150, National Bureau of Economic Research, Inc.
  7. Costas Meghir & Luigi Pistaferri, 2001. "Income variance dynamics and heterogenity," IFS Working Papers, Institute for Fiscal Studies W01/07, Institute for Fiscal Studies.
  8. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 411-45, March.
  9. Irlenbusch, Bernd & Sliwka, Dirk, 2006. "Career concerns in a simple experimental labour market," European Economic Review, Elsevier, Elsevier, vol. 50(1), pages 147-170, January.
  10. Henry S. Farber & Robert Gibbons, 1994. "Learning and Wage Dynamics," Working Papers 707, Princeton University, Department of Economics, Industrial Relations Section..
  11. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns Of Mutual Fund Managers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(2), pages 389-432, May.
  12. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 83-114, January.
  13. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 87(3), pages 355-74, August.
  14. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  15. Borland, Jeff, 1992. " Career Concerns: Incentives and Endogenous Learning in Labour Markets," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 6(3), pages 251-70.
  16. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  17. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 921-55, November.
  18. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 288-307, April.
  19. Fabian Lange, 2007. "The Speed of Employer Learning," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 25, pages 1-35.
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Cited by:
  1. Frederiksen, Anders & Lange, Fabian & Kriechel, Ben, 2012. "Subjective Performance Evaluations and Employee Careers," IZA Discussion Papers 6373, Institute for the Study of Labor (IZA).

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