Returns to Tenure or Seniority?

44 Pages Posted: 23 May 2008

See all articles by Sebastian Buhai

Sebastian Buhai

Stockholm University - Swedish Institute for Social Research (SOFI)

Miguel Portela

University of Minho; IZA Institute of Labor Economics

Coen Teulings

CPB Netherlands Bureau of Economic Policy Analysis; Tinbergen Institute

Aico van Vuuren

Erasmus University Rotterdam (EUR) - Department of Economics

Multiple version iconThere are 4 versions of this paper

Abstract

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.

Keywords: irreversible investment, efficient bargaining, seniority, LIFO, matched employer-employee data, EPL

JEL Classification: I21, Z13, J24

Suggested Citation

Buhai, Ioan-Sebastian and Portela, Miguel and Teulings, C.N. and van Vuuren, Aico, Returns to Tenure or Seniority?. , Vol. , pp. -, . Available at SSRN: https://ssrn.com/abstract=1136464 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Ioan-Sebastian Buhai (Contact Author)

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

Kyrkgatan 43B
SE-106 91 Stockholm
Sweden

Miguel Portela

University of Minho ( email )

Braga, 4700
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

C.N. Teulings

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Aico Van Vuuren

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4082158 (Phone)
+31 10 4089149 (Fax)

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