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Returns to Tenure or Seniority?

Author

Listed:
  • Sebastian Buhai

    (Aarhus School of Business, University of Aarhus, Denmark, and Erasmus University Rotterdam)

  • Miguel Portela

    (University of Minho, Portugal)

  • Coen N. Teulings

    (CPB Netherlands Bureau for Economic Policy Analysis, The Hague, and University of Amsterdam)

  • Aico van Vuuren

    (VU University Amsterdam)

Abstract

This discussion paper resulted in a publication in 'Econometrica' . This study documents two empirical regularities, using data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm (Last In, First Out; LIFO). Second, workers’ wages rise with seniority (= a worker’s tenure relative to the tenure of her colleagues). We seek to explain these regularities by developing a dynamic model of the firm with stochastic product demand and hiring cost (= irreversible specific investments). There is wage bargaining between a worker and its firm. Separations (quits or layoffs) obey the LIFO rule and bargaining is efficient (a zero surplus at the moment of separation). The LIFO rule provides a stronger bargaining position for senior workers, leading to a return to seniority in wages. Efficiency in hiring requires the workers’ bargaining power to be in line with their share in the cost of specific investment. Then, the LIFO rule is a way to protect their property right on the specific investment. We consider the effects of Employment Protection Legislation and risk aversion.

Suggested Citation

  • Sebastian Buhai & Miguel Portela & Coen N. Teulings & Aico van Vuuren, 2008. "Returns to Tenure or Seniority?," Tinbergen Institute Discussion Papers 08-010/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20080010
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    More about this item

    Keywords

    irreversible investment; efficient bargaining; seniority; LIFO; matched employer-employee data; EPL;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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