Worker-Firm Dynamics with Seniority Bargaining (joint with Miguel Portela and Coen Teulings)

Abstract:
In this paper we provide theoretical and empirical microfoundations for worker seniority (a worker’s tenure relative to the tenure of all her co-workers at the firm) as natural bargaining device in large firms with stochastic product demand and irreversible firm-specific investments required for each newly hired worker. The firm and its workers simultaneously bargain for layoff order and wage schedule, whereupon inframarginal senior workers get wage premia and layoff insurance. Buhai et al (2014, ECTA) have already shown empirically that wages increase and job exit hazard decreases with seniority, on exhaustive linked-employer-employee-data from Denmark and Portugal. Using the same data and econometric methodology adapted from Buhai and Teulings (2014, JBES) and Buhai et al (2014, ECTA), here we prove that the seniority profile in wages is a proxy for the return to the extent of necessary worker-firm irreversible specific investments.