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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.

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This study provides direct evidence concerning the relationship between experience and performance among managerial and professional employees doing similar work in two major U. S. corporations. The facts presented indicate that while, within grade levels, there is a strong positive association between experience and relative earnings, there is either no association or a negative association between experience and relative rated performance. If we are correct that the performance ratings given to managerial and professional employees in any grade level adequately reflect those employees' relative productivity in the year of assessment, the results imply that the human capital on-the-job training model cannot explain a substantial part of the observed return to labor market experience.There is abundant evidence that earnings grow with labor market experience over most of a normal worklife. Since the advent of human capital theory,1 the vast majority of labor economists have accepted, or at least not openly challenged, this theory's contention that the upward sloping segment of the experience-earnings profile reflects on-the-job training, which causes the relevant underlying experience-productivity profile to slope upwards However, there are other potential explanations of the relationship between experience and earnings in which productivity growth plays a very minor role. For instance, Mincer [1974, p. 80] recognizes the possibility that the positive association between experience and earnings might only "reflect the prevalence of institutional arrangements such as seniority provisions in employment practices." He then makes the observation that sets the stage for this study: "Such practices, however, do not contradict the productivity-augmenting hypothesis, unless it can be shown that growth of earnings under seniority provisions is largely independent of productivity growth." 2 Thus, the human capital interpretation of the experience-earnings profile is distinguished from other interpretations by the pre-* We are most grateful to C. Brown, G. Chamberlain, J. Dunlop, R. Freeman, Z. Griliches, H. Leonard, H. G. Lewis, J. Mincer, A. Rees, S. Rosen, M. Wagner, and participants in seminars at Berkeley, the University of Chicago, Columbia, Harvard, the National Bureau of Economic Research, the University of Pennsylvania, and Princeton for their helpful criticisms and suggestions. We are also indebted to J. Fay and M. Van Denburgh for their invaluable assistance in carrying out the research to be discussed. The study was supported by the National Bureau's program for research on labor economics. Any opinions expressed are not necessarily shared by the individuals who have aided us or by the National Bureau.1. This event can be marked by the publication of Becker 119641. 2. Mincer has seniority provisions under collective bargaining agreements in mind when he makes this statement, but his logic applies equally well to other institutional settings.