Do Wages Rise With Job Seniority?

Abstract

The extent to which wages rise with the accumulation of seniority (tenure) in a firm after one controls for total labor market experience is a fundamental question about the structure of earnings. A variety of studies have found a large, positive partial effect of tenure on wages. This paper re-examines the evidence using a simple instrumental variables scheme to deal with well known estimation biases which arise from the fact that tenure is likely to be related to unobserved individual and job characteristics affecting the wage. We use the variation of tenure over a given job match as the principal instrumental variable for tenure. The variation in tenure over the job, in contrast to variation in tenure across individuals and jobs, is uncorrelated by construction with the fixed individual specific and job match specific components of the error term of the wage equation. Our main finding is that the partial effect of tenure on wages is small, and that general labor market experience and job shopping in the labor market account for most wage growth over a career. The strong cross section relationship between tenure and wages is due primarily to heterogeneity bias.

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

“…that are extensively documented in the literature (Abraham and Farber 1987; Altonji and Shakotko 1987;Topel 1991). The current consensus is that OLS estimates are not only biased, but that the direction of bias is ambiguous.…”

“…The observed lower returns on tenure for women may include a component that is due to employer discrimination -i.e., discrimination based on rational expectations about women's attachment to jobs. 5 For example, if employers engage in statistical discrimination then the perception of women as "less" stable workers could lead employers to systematically not hire women into jobs with opportunities of specific training or learning. 6 Although it is clearly important to distinguish 3 Note however, that Hersch and Reagan (1997), citing evidence that returns to tenure tend to be greater for female than for male workers, develop an agency model of wage contracts that shows efficient wage-tenure profiles are steeper for women than men as a direct result of their shorter working life.…”

“…The first is Topel's two-step estimation procedure (1991) that yields a supposedly unbiased lower bound for tenure and an unbiased upper bound for experience. The second is Altonji and Shakotko's (1987) instrumental variables procedure that corrects for tenure bias resulting from individual and job match heterogeneity. 2 We present estimates of wage returns on tenure and experience using both procedures, and the gender disparities in these estimates are qualitatively similar across the two procedures.…”

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).…”