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Bias in estimating returns to tenure: The impact of monopsony power

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  • Snell, Andy
  • Thomas, Jonathan P.
  • Martins, Pedro

Abstract

This note revisits the bias in returns to tenure estimates (RTT) that arises when firm employment and wages comove through firm-specific (FS) wage shocks — shocks to wages that likely occur in the presence of monopsony power(MP). In an earlier paper, Snell et al. (2018), found that adding firm-year fixed effects to a Mincer regression for workers in a small sample of firms in German and Portuguese panel data raised the estimated RTT schedules by about 30%. Here we re-examine the sign and magnitude of this bias using the universe of workers in Portugal. We find the bias remains negative and large. We then split the data into low and high labour market concentration firms to examine the role MP plays in these results. We find that the RTT bias arising from FS wage shocks is larger in firms with high MP than low MP. The results reinforce the need to control for FS wage shocks in RTT estimation exercises especially where comparisons across different workers in different firms are made.

Suggested Citation

  • Snell, Andy & Thomas, Jonathan P. & Martins, Pedro, 2025. "Bias in estimating returns to tenure: The impact of monopsony power," Economics Letters, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176524005895
    DOI: 10.1016/j.econlet.2024.112105
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    References listed on IDEAS

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    1. Andy Snell & Pedro Martins & Heiko Stüber & Jonathan P. Thomas, 2018. "Bias in Returns to Tenure When Firm Wages and Employment Comove: A Quantitative Assessment and Solution," Journal of Labor Economics, University of Chicago Press, vol. 36(1), pages 47-74.
    2. Andrea Bassanini & Giulia Bovini & Eve Caroli & Jorge Casanova Ferrando & Federico Cingano & Paolo Falco & Florentino Felgueroso & Marcel Jansen & Pedro S. Martins & António Melo & Michael Oberfichtne, 2022. "Labour Market Concentration, Wages and Job Security in Europe," Working Papers 2022-04, FEDEA.
    3. I. Sebastian Buhai & Miguel A. Portela & Coen N. Teulings & Aico van Vuuren, 2014. "Returns to Tenure or Seniority?," Econometrica, Econometric Society, vol. 82(2), pages 705-730, March.
    4. Michael J. Pries & Richard Rogerson, 2022. "Declining Worker Turnover: The Role of Short-Duration Employment Spells," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(1), pages 260-300, January.
    5. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-176, February.
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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