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Firm Heterogeneity and Worker Self-Selection Bias Estimated Returns to Seniority

  • David N. Margolis

I develop a model under which workers with different marginal productivities self-select into firms based on the firm's seniority reward policy. I show how this may bias upwards the estimates of returns to seniority in cross-sectional and even some longitudinal studies, when differences in workforce composition are ignored. I develop a new estimator of true returns to seniority and empirically test the implications of the model. I show how several previous estimation strategies over-estimate returns to seniority, particularly in firms that offer zero or negative returns to job seniority, using a large longitudinal sample of French firms and workers. Dans ce papier je décris un modèle d'embauches où les individus avec des productivités marginales hétérogènes se trouvent par autosélection, dans les entreprises avec des politiques de rémunération d'ancienneté différentes. Je montre comment ceci peut induire un biais positif dans les estimateurs de rendement de l'ancienneté basés sur les données en coupe transversales et même certains estimateurs basés sur les données longitudinales. Je décris un nouvel estimateur du vrai rendement de l'ancienneté, que j'utilise pour tester les implications du modèle. Je montre comment certaines autres approches surestiment les rendements de l'ancienneté, surtout dans les firmes qui rémunèrent très peu l'ancienneté, en utilisant une grande base de données longitudinales des employeurs et employés français.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-04.

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Length: 34 pages
Date of creation: 01 Jan 1995
Date of revision:
Handle: RePEc:cir:cirwor:95s-04
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  1. Andrew Weiss & Ruqu Wang, 1990. "A Sorting Model of Labor Contracts: Implications for Layoffs and Wage-Tenure Profiles," NBER Working Papers 3448, National Bureau of Economic Research, Inc.
  2. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High-Wage Workers and High-Wage Firms," CIRANO Working Papers 94s-23, CIRANO.
  3. Vogelsang, T.J. & Perron, P., 1994. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," Cahiers de recherche 9422, Universite de Montreal, Departement de sciences economiques.
  4. Katharine G. Abraham & Henry S. Farber, 1986. "Job Duration, Seniority and Earnings," Working papers 407, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Boyer, M. & Laffont, J.J. & Mahenc, P. & Moreau, M., 1994. "Sequential Location Equilibria Under Incomplete Information," Cahiers de recherche 9426, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  6. Salop, Joanne & Salop, Steven, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 619-27, November.
  7. Margolis, D..N., 1995. "Firm Heterogeneity and Worker Self-Selection Bias Estimated Returns to Seniority," Cahiers de recherche 9502, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  8. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  9. Altonji, Joseph G & Shakotko, Robert A, 1987. "Do Wages Rise with Job Seniority?," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 437-59, July.
  10. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  11. 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 145-76, February.
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