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Department of Economics, Aarhus School of Business, University of Aarhus Working Papers, Department of Economics, Aarhus School of Business, University of Aarhus

No 08-1:
Returns to Tenure or Seniority?

Sebastian Buhai (), Miguel Portela (), Coen Teulings () and Aico van Vuuren ()

Abstract: 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 e¤ects of Employment Protection Legislation and risk aversion.

Keywords: irreversible investment; efficient bargaining; seniority; LIFO; (follow links to similar papers)

JEL-Codes: J31; J41; J63; (follow links to similar papers)

51 pages, January 18, 2008

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