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Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

Author

Listed:
  • Buhai, Sebastian

    (Department of Economics, Aarhus School of Business)

  • Teulings, Coen

    (SEO Economic Research)

Abstract

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.

Suggested Citation

  • Buhai, Sebastian & Teulings, Coen, 2005. "Tenure Profiles and Efficient Separation in a Stochastic Productivity Model," Working Papers 05-9, University of Aarhus, Aarhus School of Business, Department of Economics, revised 03 Oct 2006.
    • Handle: RePEc:hhs:aareco:2005_009
    Note: Rev. version
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    Cited by:

    1. Cahuc, Pierre & Malherbet, Franck & Prat, Julien, 2019. "The Detrimental Effect of Job Protection on Employment: Evidence from France," IZA Discussion Papers 12384, Institute of Labor Economics (IZA).
    2. Michael Elsby & Axel Gottfries & Pawel Krolikowski & Gary Solon, 2023. "Wage Adjustment in Efficient Long-Term Employment Relationships," Working Papers 23-23, Federal Reserve Bank of Cleveland.
    3. Pieter A. Gautier & Coen N. Teulings, 2015. "Sorting And The Output Loss Due To Search Frictions," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1136-1166, December.
    4. 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.
    5. Pieter A. Gautier & Coen N. Teulings, 2015. "Sorting And The Output Loss Due To Search Frictions," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1136-1166, December.
    6. Coen Teulings, 2010. "How to Share Our Risks Efficiently? Principles for Optimal Social Insurance and Pension Provision," De Economist, Springer, vol. 158(1), pages 1-21, April.
    7. I. Sebastian Buhai, 2025. "Real Option AI: Reversibility, Silence, and the Release Ladder," Papers 2511.16958, arXiv.org.
    8. Julien Prat, 2010. "The rate of learning-by-doing: estimates from a search-matching model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(6), pages 929-962.

    More about this item

    Keywords

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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