Working Paper: CEPR ID: DP5577
Authors: Sebastian Buhai; Coen N. Teulings
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.
Keywords: Efficient Bargaining; Job Tenure; Option Theory; Random Productivity Growth; Wage Growth; Wage-Tenure Profiles
JEL Codes: C51; C52; J63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wages (J31) | job tenure (M51) |
| random evolution of wages (J39) | job tenure (M51) |
| log productivity value in the job and log reservation wage (J39) | separation occurs (J12) |
| favorable wage evolution (J31) | jobs survive (J68) |
| negative wage evolution (J39) | jobs eliminated (J63) |
| selection effects (C52) | concave tenure profile (D51) |
| favorable wage trajectories (J31) | observed tenure profiles (C41) |
| wage increases in first half of job spell (J31) | lack of wage decreases in latter half (J31) |