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Promotion Signals, Age and Education

  • Bognanno, Michael L.


    (Temple University)

  • Melero Martín, Eduardo


    (Universidad Carlos III de Madrid)

This paper examines whether more informative job promotions carry larger wage increases. In job assignment models with asymmetric information, unexpected promotions send a signal to the external labor market to revise upward their assessment of a worker's ability. The employing firm must then increase wages to prevent the worker from being bid away. Less educated workers are assumed to come from a group with lower average ability. Their promotion is hypothesized to signal a larger positive assessment of their ability than for more highly educated workers for whom promotion is expected. Promotions for younger workers, with less known about their abilities, should also result in strong signaling effects. We find results in accordance with our hypotheses regarding the effect of both age and education on the gains to promotion. However, the statistical significance of the estimates hinges on the promotion definition. Younger workers receive statistically significantly higher wage increases upon promotion only when promotion is defined by the attainment of managerial responsibilities not previously held. Less educated workers obtain statistically significantly larger wage increases upon promotion at a weak level of significance (10%) across definitions of promotion but at a high level of significance (5%) only when the subjective definition of promotion is used. We interpret the sensitivity to the definition of promotion to suggest that promotions may be heterogeneous in the information they reveal about the employee in way that depends on the characteristics of the employee.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6431.

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Length: 24 pages
Date of creation: Mar 2012
Date of revision:
Publication status: forthcoming in: Journal of Economics and Management Strategy
Handle: RePEc:iza:izadps:dp6431
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References listed on IDEAS
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  1. Christian Belzil & Michael Bognanno, 2004. "The Promotion Dynamics of American Executives," Post-Print halshs-00180126, HAL.
  2. DeVaro, Jed & Waldman, Michael, 2006. "The signaling role of promotions: Further theory and empirical evidence," MPRA Paper 1550, University Library of Munich, Germany.
  3. Joshua C. Pinkston, 2009. "A Model of Asymmetric Employer Learning with Testable Implications," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 367-394.
  4. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 247-277, April.
  5. McCue, Kristin, 1996. "Promotions and Wage Growth," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 175-209, April.
  6. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-68, May.
  7. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
  8. repec:oup:qjecon:v:114:y:1999:i:4:p:1321-1358 is not listed on IDEAS
  9. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 651-691.
  10. Michael R. Pergamit & Jonathan R. Veum, 1999. "What is a promotion?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 52(4), pages 581-601, July.
  11. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  12. repec:oup:restud:v:49:y:1982:i:3:p:315-33 is not listed on IDEAS
  13. repec:oup:qjecon:v:87:y:1973:i:3:p:355-74 is not listed on IDEAS
  14. Michael R. Pergamit & Jonathan R. Veum, 1999. "What is a Promotion?," ILR Review, Cornell University, ILR School, vol. 52(4), pages 581-601, July.
  15. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S227-52, October.
  16. repec:oup:restud:v:62:y:1995:i:2:p:315-39 is not listed on IDEAS
  17. repec:oup:qjecon:v:109:y:1994:i:4:p:881-919 is not listed on IDEAS
  18. Francesconi, Marco, 2001. " Determinants and Consequences of Promotions in Britain," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(3), pages 279-310, July.
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