Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2008-01-22 Number: 08-010/3 Author-Name: Sebastian Buhai Author-Email: email@example.com Author-Workplace-Name: Aarhus School of Business, University of Aarhus, Denmark, and Erasmus University Rotterdam Author-Name: Miguel Portela Author-Workplace-Name: University of Minho, Portugal Author-Name: Coen N. Teulings Author-Workplace-Name: CPB Netherlands Bureau for Economic Policy Analysis, The Hague, and University of Amsterdam Author-Name: Aico van Vuuren Author-Workplace-Name: VU University Amsterdam Title: Returns to Tenure or Seniority? Abstract: This discussion paper resulted in a publication in 'Econometrica'.
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 effects of Employment Protection Legislation and risk aversion. Classification-JEL: J31; J41; J63 Keywords: irreversible investment; efficient bargaining; seniority; LIFO; matched employer-employee data; EPL File-Url: http://papers.tinbergen.nl/08010.pdf File-Format: application/pdf File-Size: 405489 bytes Handle: RePEc:tin:wpaper:20080010