Niels Westergaard-Nielsen (IZA, CCP & Department of Economics, Aarhus School of Business), Paul Bingley

Returns to Tenure: Firm and worker heterogeneity

New possibilities to study tenure in Denmark reveals that long-term worker-firm relationships are not common in Denmark. Average tenure is at the level of Anglo-Saxon countries. The long series of tenure reveals that the most important individual determinant for tenure is age. Gender differences in tenure disappear over the investigated period. Even more important is the firm–dimension. The next step is to estimate the returns to tenure. One of the main issues here is to disentangle unobserved heterogeneity from the returns to tenure. Following Kletzer (1989), Addison and Portugal (1988) and Farber (1999) we deduct from the simple returns to tenure that due to worker heterogeneity, by exploiting exogenous worker displacement due to firm closures. We find that the proportion of tenure returns due to true tenure related return is much lower than in the USA. It is also found that the return to tenure has risen from a stable 10% throughout the 1980’s to 30% today. The change coincides with decentralisation of wage bargaining and may be explained by the increased freedom to make individual contracts.

Keywords: returns to tenure, wage setting, matched employer-employee panel data.

JEL Codes: J3, M2

Session: 6d   Room 2003   Category: Labour market dynamics 3

Paper