A Theory of Wage and Promotion Dynamics Inside Firms

Abstract

In previous work we showed that a model that integrates job assignment, human-capital acquisition, and learning can explain several empirical findings concerning wage and promotion dynamics inside firms. In this paper we extend that model in two ways. First, we incorporate schooling into the model and derive a number of testable implications that we then compare with the available empirical evidence. Second, and more important, we show that introducing "task-specific" human capital allows us to produce cohort effects (i.e., the finding that a cohort that enters a firm at a low wage will continue to earn below-average wages years later). We argue that task-specific human capital is a realistic concept and may have many important implications. We also discuss limitations of our (extended) approach.

Performance, seniority, and wages: formal salary systems and individual earnings profiles

“…Performance ratings tend to fall upon advancement to a higher scale. This does not only suggest that performance requirements are more stringent in higher salary scales but 37 Gibbons and Waldman (1999) build on this mechanism to explain Baker, Gibbs, andHolmstrom's (1994a, 1994b) findings that wage growth rates are serially correlated and that past wage growth rates predict promotions.…”

“…The finding of such person effects in the wage growth rate of earnings has received wide attention in the recent theoretical literature (see e.g. Gibbons and Waldman, 1999).…”

“…36 For example, Lluis (2002) uses data from the German Socio-Economic Panel (GSOEP) and employs an econometric technique proposed by Gibbons, Katz, and Lemieux (1997) and Gibbons, Katz, Lemieux, and Parent (2002) to estimate the Gibbons and Waldman (1999a) model of promotion and wage dynamics. She concludes that evidence that there is no evidence that learning about workers' unobserved ability generates mobility across job levels.…”

Should Low-Wage Workers Care About Where They Work? Assessing the Impact of Employer Characteristics on Low-Wage Mobility

“…Job assignment, on-the-job human capital acquisition and learning about workers' unobserved productivity (Gibbons and Waldman 1999). Central to the idea of job assignment is the notion that the assignment to different job levels takes place within a hierarchical job structure based upon comparative advantage.…”

Task-specific abilities in multi-task principal–agent relationships

“…First, the analyzed framework in this paper builds on the multi-task agency model developed by Holmström and Milgrom (1991), and includes incongruent performance measures as analyzed by Feltham and Xie (1994), Bushman, Indjejikian, and Penno (2000), Banker and Thevaranjan (2000), Datar, Kulp, andLambert (2001), andBaker (2002). Second, it incorporates task-specific human capital in the sense of Gibbons and Waldman (1999), Lindbeck and Snower (2000), and Gibbons andWaldman (2004, 2006). In short, the key contribution of this paper to the literature on incentive contracts is the consideration of task-specific abilities in a multitasking framework.…”