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Tenure, Experience, Human Capital and Wages : A Tractable Equilibrium Search Model of Wage Dynamics

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Jesper Bagger, François Fontaine, Fabien Postel-Vinay and Jean-Marc Robin

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Sources of inequalities, wages mirror the labour market. While they have long been considered a simple corollary of job and employee productivity, we know now that market imperfections play a determining rôle in them. The ease with which an employer can hire someone, or an employee can change firms, can vary wages upwards or downwards. However, the empirical relevance of this argument is under-quantified, particularly if we think about how an individual’s wages can change during their working life. Does a labour market with low mobility lead to less wages growth ?
In this article, Bagger, Fontaine, Postel-Vinay and Robin propose to explain and quantify the mechanisms that underlie individual wage fluctuations. The latter will depend on the skills of the employee, the human capital that she will acquire through her work experiences and the efficiency of the firms that hire her. In addition, the salary will also depend on imperfections in the labour market. A fluid labour market allows an employee to change employer easily, finding other employment that is better paid. At the same time, it forces employers to increase wages regularly in order to keep their employees. The contribution that this article makes to the debate is to propose a model that incorporates all these elements and can be easily estimated. Using Danish data, the authors show that human capital plays an important role only during the first 10 to 15 years of a working life and essentially only for the most qualified. Changes of employment are also a key factor. In the second part of a working life, it is the increases that employers grant in order to keep their workforce that become important. For certain employees, this is the only thing that keeps their wages growing; it is important for qualified as well as unqualified workers. Extrapolating these results, the study shows that in a labour market in which mobility is difficult, we cannot hope to see salary growth throughout a working life. This could explain why, in France, they remain very static.

Original title of the article : “Tenure, Experience, Human Capital and Wages : A Tractable Equilibrium Search Model of Wage Dynamics”
Published in : American Economic Review, juin 2014.
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