Job Duration, Seniority, and Earnings

Abstract

The stylized fact that seniority and earnings in a cross-section are positively related, even after controlling for total labor market experience, has served as the basis for theoretical analyses of implicit labor contracts suggesting that workers post bonds in the form of deferred compensation in order to ensure their continued performance at an adequate level. An alternative interpretation is that good workers or workers in good jobs or good matches both earn more throughout the job and have longer job durations. Another stylized fact, that labor market experience and earnings in a cross section are positively related, has been taken as evidence of the importance of general human capital accumulation. An alternative interpretation of this evidence is that workers with more experience have had more time to find good jobs and/or good matches, resulting in higher earnings. Earnings functions are estimated including a measure of the completed duration of jobs in order to distinguish between the competing hypotheses regarding both seniority and experience. These yield three main results. First, workers in longer jobs earn significantly more in every year of the job than do workers in shorter jobs. Second, controlling for completed job duration eliminates most of the apparent return to seniority found in standard cross-section models. Thus, it appears that implicit contracts that provide for workers posting bonds through deferred wage payments are less important than has been believed. Third, for blue collar workers there is evidence that a part of the small observed (cross-sectional) return to labor market experience is due to sorting of workers into better jobs over time. There is no evidence of sorting for white collar workers.

Has the Displacement of Older Workers Increased?

“…When workers age the employer enjoys the fruits of this investment because workers are more productive, and workers gain as their wages, defined benefit pension accruals, and other forms of compensation rise with tenure at the firm (Becker, 1975). Abraham and Farber (1987) and Altonji and Shakotko (1987) demonstrated a positive relationship between tenure and earnings, supposedly reflecting the acquisition of firm-specific skills. Topel (1991) challenged these results, arguing that it was unclear whether the relationship reflected the acquisition of firm-specific skills or simply that high-wage jobs survive or that more productive people change jobs less frequently.…”

Gender gap in wage returns to job tenure and experience

“…The estimation of wage returns on tenure and experience raises a number of difficulties 1 A striking illustration of rapidly changing work expectations of women is documented in two surveys of young women aged 14 to 21 conducted a decade apart. In a 1969 survey less than 30% of the respondents expected to work at age 35, and just ten years later in 1979 over 70% of a similarly aged cohort of young women expected to work at age 35.…”

“…1 In this paper we contribute to this large and growing empirical literature on the gender wage gap by presenting an analysis of gender differences in the wage returns on an extra year of job tenure and general labor market experience. This decomposition of wage returns into a firm-specific and general component allows us to locate more precisely apotenitally important source of the gender wage disparity.…”

Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

“…The conclusions of this research still diverge, despite analyzing data from the same countries (mainly the USA) or even the same longitudinal datasets (mostly the PSID): while some authors find that large estimated returns are spurious and wage returns to tenure are actually very small, e.g. Altonji and Shakotko (1987), Abraham and Farber (1987), Williams (1997, 2005), Abowd et al (1999), others confirm large and significant wage returns close to crosssection estimates, e.g. Topel (1991), Dustmann and Meghir (2005), Buchinsky et al (2005).…”

“…Our estimation procedure exploits both pieces of information on the outside productivity to the maximum. To that end, we elaborate an idea first explored by Abraham and Farber (1987): we condition the expected wage growth within a job not only on the elapsed duration since job start -that is: current job tenure-but also on the remaining time span left till the next separation, so we take into account the complete duration of the job. We can calculate a closed form expression for this expectation.…”