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

Abstract: This paper provides a new way of analyzing tenure profiles in wages,

by modelling simultaneously the evolution of wages and the distribution

of tenures. Starting point is the observation that within-job log wages for

an individual can be described by random walk. We develop a theoretical

model based on efficient bargaining, where both log outside wage and log

wage in the current job follow a random walk. This setting allows the

application of real option theory. We derive the efficient separation rule,

which stipulates that workers switch jobs when the difference between the

outside wage and the wage in the current job reaches a threshold. The

model fits well the observed distribution of job tenures. Since we observe

outside wages only at job start and job separation, our empirical analysis

of within job wage growth is based on expected wage growth conditional

on the outside wages at both dates. Our modelling allows testing of the

efficient bargaining hypothesis. The model is estimated on the PSID.

Keywords: Random productivity growth; efficient bargaining; job tenure; wage growth; wage-tenure profiles; option theory

JEL-codes: C51; C52; J63

43 pages, First version: October 20, 2005. Revised: October 3, 2006.

Note: Rev. version

Full text files

05-9_sebu_revised.pdf  

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