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Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

  • Buhai, Sebastian

    ()

    (Department of Economics, Aarhus School of Business)

  • Teulings, Coen

    (SEO Economic Research)

This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. Starting point is the observation that within-job log wages for an individual can be described by random walk. We develop a theoretical model based on efficient bargaining, where both log outside wage and log wage in the current job follow a random walk. This setting allows the application of real option theory. We derive the efficient separation rule, which stipulates that workers switch jobs when the difference between the outside wage and the wage in the current job reaches a threshold. The model fits well the observed distribution of job tenures. Since we observe outside wages only at job start and job separation, our empirical analysis of within job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the efficient bargaining hypothesis. The model is estimated on the PSID.

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File URL: http://www.hha.dk/nat/wper/05-9_sebu_revised.pdf
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Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 05-9.

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Length: 43 pages
Date of creation: 20 Oct 2005
Date of revision: 03 Oct 2006
Handle: RePEc:hhs:aareco:2005_009
Note: Rev. version
Contact details of provider: Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 486396
Fax: +45 8615 5175
Web page: http://www.asb.dk/departments/nat.aspx

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