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Employer Learning, Productivity and the Earnings Distribution: Evidence from Performance Measures

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  • Kahn, Lisa B.

    ()
    (Yale University)

  • Lange, Fabian

    ()
    (Yale University)

Abstract

Two ubiquitous empirical regularities in pay distributions are that the variance of wages increases with experience, and innovations in wage residuals have a large, unpredictable component. The leading explanations for these patterns are that over time, either firms learn about worker productivity but productivity remains fixed or workers' productivities themselves evolve heterogeneously. In this paper, we seek to disentangle these two models and place magnitudes on their relative importance. We derive a dynamic model of learning and productivity that nests both models and allows them to coexist. We estimate our model on a 20-year panel of pay and performance measures from a single, large firm (the Baker-Gibbs-Holmstrom data). Incorporating performance measures yields two key innovations. First, the panel structure implies that we have repeat measures of correlates of productivity, as opposed to the empirical evidence on employer learning which uses one fixed measure. Second, we can separate productivity from pay, whereas the previous literature on productivity evolution could not. We find that both models are important in explaining the data. However, the predominant effect is that worker productivity evolves idiosyncratically over time, implying firms must continuously learn about a moving target. Therefore, while the majority of pay dispersion is driven by variation in individual productivity, wages differ significantly from individual productivity at all experience levels due to imperfect information. We believe this represents a significant reinterpretation of the empirical literature on employer learning.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5054.

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Length: 55 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5054

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Keywords: performance evaluations; productivity; employer learning; personnel;

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References

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  1. Kahn, Lisa B., 2010. "The long-term labor market consequences of graduating from college in a bad economy," Labour Economics, Elsevier, Elsevier, vol. 17(2), pages 303-316, April.
  2. James L. Medoff & Katharine G. Abraham, 1980. "Experience, Performance, and Earnings," NBER Working Papers 0278, National Bureau of Economic Research, Inc.
  3. Robert Gibbons & Michael Waldman, 2003. "Enriching a Theory of Wage and Promotion Dynamics Inside Firms," NBER Working Papers 9849, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 881-919, November.
  7. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(4), pages 665-88, August.
  8. Brian A. Jacob & Lars Lefgren, 2008. "Can Principals Identify Effective Teachers? Evidence on Subjective Performance Evaluation in Education," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 26, pages 101-136.
  9. Michael Gibbs & Wallace Hendricks, 2004. "Do formal salary systems really matter?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
  10. DeVaro, Jed & Waldman, Michael, 2006. "The signaling role of promotions: Further theory and empirical evidence," MPRA Paper 1550, University Library of Munich, Germany.
  11. Peter Arcidiacono & Patrick Bayer & Aurel Hizmo, 2008. "Beyond Signaling and Human Capital: Education and the Revelation of Ability," NBER Working Papers 13951, National Bureau of Economic Research, Inc.
  12. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 19(2-3), pages 247-277, April.
  13. 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.
  14. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
  15. Kahn, Lisa B., 2013. "Asymmetric Information between Employers," IZA Discussion Papers 7147, Institute for the Study of Labor (IZA).
  16. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(2), pages 338-75, April.
  17. 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.
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Cited by:
  1. Kahn, Lisa B., 2013. "Asymmetric Information between Employers," IZA Discussion Papers 7147, Institute for the Study of Labor (IZA).
  2. Lisa B. Kahn, 2013. "Asymmetric Information between Employers," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 5(4), pages 165-205, October.
  3. Kuhnen, Camelia M. & Oyer, Paul, 2012. "Exploration for human capital: Theory and evidence from the MBA labor market," MPRA Paper 39411, University Library of Munich, Germany.

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