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Bias in Returns to Tenure When Firm Wages and Employment Comove: A Quantitative Assessment and Solution

Author

Listed:
  • Andy Snell
  • Pedro Martins
  • Heiko Stüber
  • Jonathan P. Thomas

Abstract

It is well known that unless worker-firm match quality is controlled for, reduced-form estimates of returns to firm tenure will be biased. In this paper, we show that there is a further pervasive source of bias, namely, the comovement of firm employment and firm wages. We argue that firm-year fixed effects must be used to eliminate this bias. Estimates from two large-panel data sets from Germany and Portugal show that the bias is empirically important. Finally, we show that the results extend to tenure correlates used in macroeconomics, such as the minimum unemployment rate since joining the firm.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jlabec:doi:10.1086/693867
    DOI: 10.1086/693867
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    Cited by:

    1. Martins, Pedro S., 2021. "Should the maximum duration of fixed-term contracts increase in recessions? Evidence from a law reform," International Review of Law and Economics, Elsevier, vol. 68(C).
    2. Tiago Pires & Arek Szydłowski & Shuai Zhao, 2024. "Firm‐specific Human Capital Accumulation: Evidence from Brazil," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 86(3), pages 568-605, June.
    3. Sónia Cabral & Pedro S. Martins & João Pereira dos Santos & Mariana Tavares, 2021. "Collateral Damage? Labour Market Effects of Competing with China—at Home and Abroad," Economica, London School of Economics and Political Science, vol. 88(350), pages 570-600, April.
    4. Pedro Portugal & John T. Addison, 2022. "Retrieving the Returns to Experience, Tenure, and Job Mobility from Work Histories," Working Papers w202221, Banco de Portugal, Economics and Research Department.
    5. Martins, Pedro S. & Piracha, Matloob & Varejão, José, 2018. "Do immigrants displace native workers? Evidence from matched panel data," Economic Modelling, Elsevier, vol. 72(C), pages 216-222.
    6. Sarah Louise Jewell & Giovanni Razzu & Carl Singleton, 2020. "Who Works for Whom and the UK Gender Pay Gap," British Journal of Industrial Relations, London School of Economics, vol. 58(1), pages 50-81, March.
    7. Galindo da Fonseca, João Alfredo & Gallipoli, Giovanni & Yedid-Levi, Yaniv, 2020. "Match quality and contractual sorting," Labour Economics, Elsevier, vol. 66(C).
    8. 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).
    9. Jorge Pérez Pérez & José G. Nuño-Ledesma, 2024. "Workers, Workplaces, Sorting, and Wage Dispersion in Mexico," Working Papers 2024-06, Banco de México.
    10. Osuna-Gomez, Daniel, 2023. "The impact of the COVID-19 pandemic on post-great recession entrants: Evidence from Mexico," Labour Economics, Elsevier, vol. 81(C).
    11. Osuna Gómez Daniel, 2022. "The Impact of the COVID-19 Pandemic on Post-Great Recession Formal Entrants: Evidence from Mexico," Working Papers 2022-19, Banco de México.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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