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Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

  • Buhai, Sebastian

    ()

    (Aarhus School of Business)

  • Teulings, Coen

    ()

    (University of Cambridge)

This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. 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, as found empirically. This setting allows the application of real option theory. We derive the efficient separation rule. The model fits the observed distribution of job tenures well. 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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1997.

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Length: 54 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:iza:izadps:dp1997
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