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Why Pay Seniority Wages?

  • Zwick, Thomas

This paper characterises establishments that pay higher seniority wages than their competitors. It tests whether seniority wages are paid on the basis of agency, human capital or efficiency wage considerations. A representative linked employeremployee panel and an innovative two-step estimation strategy are used to first calculate individual seniority wages taking into account that match quality biases tenure effects on wages. Then individual seniority wages are aggregated to the establishment level. Finally, the seniority wage indicator is explained by establishment characteristics. This contribution shows that large, profitable and establishments with a highly qualified workforce pay high seniority wages. Also collective bargaining coverage and works councils have a positive impact and the share of foreigners, training intensity and initial wage levels have a negative correlation with seniority wages. The results support an agency based motivation for seniority wages.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 09-005.

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Date of creation: 2009
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Handle: RePEc:zbw:zewdip:7531
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  1. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future Directions," NBER Working Papers 6957, National Bureau of Economic Research, Inc.
  2. Zwick, Thomas, 2008. "The Employment Consequences of Seniority Wages," ZEW Discussion Papers 08-039, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Orlowski, Robert & Riphahn, Regina T., 2008. "The East German Wage Structure after Transition," IZA Discussion Papers 3861, Institute for the Study of Labor (IZA).
  4. Parent, D., 1995. "Industry-Specific Capiatl and the Wage Profile: Evidence from the NLSY and the PSID," Cahiers de recherche 9508, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. David Margolis, 1996. "Cohort Effects and Returns to Seniority in France," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00353897, HAL.
  6. Hutchens, Robert, 1986. "Delayed Payment Contracts and a Firm's Propensity to Hire Older Workers," Journal of Labor Economics, University of Chicago Press, vol. 4(4), pages 439-57, October.
  7. Neumark, David & Taubman, Paul, 1995. "Why Do Wage Profiles Slope Upward? Tests of the General Human Capital Model," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 736-61, October.
  8. Connolly, Helen & Gottschalk, Peter T., 2006. "Differences in Wage Growth by Education Level: Do Less-Educated Workers Gain Less from Work Experience?," IZA Discussion Papers 2331, Institute for the Study of Labor (IZA).
  9. David N. MARGOLIS, 1996. "Cohort Effects and Returns to Seniority in France," Annales d'Economie et de Statistique, ENSAE, issue 41-42, pages 443-464.
  10. Robert Orlowski & Regina T. Riphahn, 2008. "The East German Wage Structure after Transition," CESifo Working Paper Series 2511, CESifo Group Munich.
  11. Judith K. Hellerstein & David Neumark, 1995. "Are Earnings Profiles Steeper Than Productivity Profiles? Evidence from Israeli Firm-Level Data," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 89-112.
  12. Hashimoto, Masanori & Raisian, John, 1985. "Employment Tenure and Earnings Profiles in Japan and the United States," American Economic Review, American Economic Association, vol. 75(4), pages 721-35, September.
  13. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-38, May.
  14. Lorne Carmichael, 1981. "Firm-Specific Human Capital and Promotion Ladders," Working Papers 452, Queen's University, Department of Economics.
  15. Hutchens, Robert M, 1987. "A Test of Lazear's Theory of Delayed Payment Contracts," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages S153-70, October.
  16. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
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