Unobserved Individual and Firm Heterogeneity in Wage and Tenure Functions: Evidence from German Linked Employer-Employee Data

42 Pages Posted: 26 Apr 2007

See all articles by Thomas Cornelißen

Thomas Cornelißen

University of Hannover

Olaf Hübler

University of Hannover; IZA Institute of Labor Economics

Date Written: April 2007

Abstract

We estimate wage and job tenure functions that include individual and firm effects capturing time-invariant unobserved worker and firm heterogeneity using German linked employer-employee data (LIAB data set). We find that both types of heterogeneity are correlated to the observed characteristics and that it is therefore warranted to include individual and firm fixed effects in both the wage and the job tenure equation. We look into the correlation of the unobserved heterogeneity components with each other. We find that high-wage workers tend to be low-tenure workers, i.e. higher unobserved ability seems to be associated with higher job mobility. At firm level, there seems to be a trade-off between wages and job stability: High-wage firms tend to be low-tenure firms, which suggests that low job stability may be compensated by higher wages. High-wage workers seem to sort into low-wage/high-tenure firms. They seem to forgo some of their earnings potential in favour of higher job stability.

Keywords: linked employer-employee data, unobserved worker and firm heterogeneity, tenure, wages

JEL Classification: C23, J31, J62, J63

Suggested Citation

Cornelißen, Thomas and Hübler, Olaf, Unobserved Individual and Firm Heterogeneity in Wage and Tenure Functions: Evidence from German Linked Employer-Employee Data (April 2007). IZA Discussion Paper No. 2741. Available at SSRN: https://ssrn.com/abstract=982162

Thomas Cornelißen

University of Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

Olaf Hübler (Contact Author)

University of Hannover ( email )

Institute of Quantitative Economic Research
D-30167 Hannover
Germany
+49 511 762 4794 (Phone)
+49 511 762 3923 (Fax)

IZA Institute of Labor Economics

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

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