Seniority, Experience, and Wages in the UK

This paper uses BHPS data to investigate the relative importance of seniority and experience in determining male wages in the UK labor market. Using both the Altonji and Shakotko instrumental variable and the Topel two-step estimation approaches, I find that tenure plays a modest role, increasing wages by about 1 percent each year over the first 10 years on the job. General labor market experience has a larger role, so that after 30 years wages have increased by about 60 percent. Individual and job match heterogeneity are important, and should be carefully modeled when estimating wage equations for the British labor market. These results are remarkably similar to the most recent evidence about these relationships in the US labor market. After extending the standard model to include industry experience, I find that the estimated impact of job seniority becomes negligible for nonunion workers. Instead, wages rise about 10 percent with the accumulation of 10 years of industry experience. One plausible explanation is that for nonunion workers, productivity-enhancing human capital investments are not job specific, but rather transferable within a particular industry. For union workers, job specific seniority plays a more important role, as 10 years of seniority raises wages by about twice as much as for nonunion workers. Further, unobservable individual and job match heterogeneity is unimportant when estimating union worker wage equations. I find weak evidence that at least some of this seniority effect for union workers remains after including industry experience in the analysis.