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A Theory of Wage and Promotion Dynamics in Internal Labor Markets

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  • Robert Gibbons
  • Michael Waldman

Abstract

We attempt to explain employment practices in internal labor markets using models that combine job assignment, on-the-job human-capital acquisition, and learning. We show that a framework that integrates these familiar ideas captures a number of recent empirical findings concerning wage and promotion dynamics in internal labor markets, including the following. First, real wage decreases are a minority of the observations, but are not rare, while demotions are very rare. Second, there is significant serial correlation in wage increases. Third, promotions are associated with particularly large wage increases, but these wage increases are small relative to the difference between average wages across levels of a job ladder. Fourth, on average, workers who receive large wage increases early in their stay at one level of a job ladder are promoted more quickly to the next level. Fifth, individuals promoted from one level of a job ladder to the next come disproportionately, but not exclusively, from the top of the lower job's wage distribution (and arrive disproportionately, but not exclusively, at the bottom of the higher job's wage distribution).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6454.

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Date of creation: Mar 1998
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Publication status: published as Gibbons, Robert and Michael Waldman. "A Theory Of Wages And Promotion Dynamics Inside Firms," Quarterly Journal of Economics, 1999, v114(4,Nov), 1321-1358.
Handle: RePEc:nbr:nberwo:6454

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References

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  1. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
  2. Prendergast, Canice, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 523-34, May.
  3. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 247-277, April.
  4. Farber, Henry S & Gibbons, Robert, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(4), pages 1007-47, November.
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  7. Harris, Milton & Holstrom, Bengt, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(3), pages 315-33, July.
  8. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2002. "Comparative Advantage, Learning, and Sectoral Wage Determination," CIRANO Working Papers 2002s-35, CIRANO.
  2. Stephanie Lluis, 2005. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 23(4), pages 725-768, October.
  3. Sang-Hyop Lee & Sumner La Croix, 2014. "Does Versatility Matter in Match-Play Sports? Evidence from Sumo Wrestling," Working Papers 201411, University of Hawaii at Manoa, Department of Economics.
  4. Daniel Parent, 2009. "The effect of pay-for-performance contracts on wages," Empirical Economics, Springer, vol. 36(2), pages 269-295, May.
  5. Lluis, S., 2001. "Wage Policy of Firms: An Empirical Investigation," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 2001-18, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  6. Lalith Munasinghe, 2005. "A Theory of Wage and Turnover Dynamics," 2005 Meeting Papers 924, Society for Economic Dynamics.
  7. Ariga, Kenn & Brunello, Giorgio & Ohkusa, Yasushi, 1997. "Fast Track: Is it in the Genes? The Promotion Policy of a Large Japanese Firm," CEPR Discussion Papers 1622, C.E.P.R. Discussion Papers.

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