Separation Risk and Firm Size-Earnings Relationships in Japan and the US

Abstract

Separations among workers in large Japanese firms, while rare until recently are quite costly. Such workers must re-enter another firm at a relatively low level along the tenure-earnings profile, or move to a smaller firm where the tenure-earnings profile is much flatter. In either case, in relative terms, separations are very costly to workers in large firms, and such workers must be differentially compensated for the risk of separation. The results here show that compensation for such separation risk is an important factor in the firm size-earnings differential in Japan, but not in the US.

Keywords: Separation risk, Firm size-earnings, US, Japan