Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

Tinbergen Institute Discussion Paper No. 2005-099/3

54 Pages Posted: 10 Mar 2006

See all articles by Sebastian Buhai

Sebastian Buhai

Stockholm University - Swedish Institute for Social Research (SOFI)

Coen N. Teulings

University of Amsterdam; University of Cambridge

Multiple version iconThere are 3 versions of this paper

Date Written: February 26, 2006

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. We develop a theoretical model based on effcient bargaining, where both log outside wage and log wage in the current job follow a random walk, as found empirically. This setting allows the application of real option theory. We derive the effcient separation rule. The model fits the observed distribution of job tenures well. 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 effcient bargaining hypothesis. The model is estimated on the PSID.

Keywords: random productivity growth, efficient bargaining, job tenure, inverse gaussian, wage-tenure profiles, option theory

JEL Classification: C51, C52, J63

Suggested Citation

Buhai, Ioan-Sebastian and Teulings, Coen N., Tenure Profiles and Efficient Separation in a Stochastic Productivity Model (February 26, 2006). Tinbergen Institute Discussion Paper No. 2005-099/3, Available at SSRN: https://ssrn.com/abstract=839764 or http://dx.doi.org/10.2139/ssrn.839764

Ioan-Sebastian Buhai (Contact Author)

Stockholm University - Swedish Institute for Social Research (SOFI) ( email )

Kyrkgatan 43B
SE-106 91 Stockholm
Sweden

Coen N. Teulings

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom