Bias in Returns to Tenure When Firm Wages and Employment Co-move: A Quantitative Assessment and Solution
by Andy Snell, Jonathan Thomas, Pedro Martins and Heiko Stuber
Published in Journal of Labor Economics in February 2018
Abstract
It is well known that, unless worker- firm match quality is controlled for, reduced form estimates of returns to rm tenure will be biased. In this paper we show that there is a further pervasive source of bias, namely the co-movement of fi rm employment and firm wages in response to the business cycle and other shocks. We argue that fi rm-year firm-year fixed effects must be used to eliminate this bias. Estimates from two large panel datasets from Germany and Portugal show that the bias is empirically important. We discuss the implications for tenure correlates used in macroeconomics such as the minimum unemployment rate since joining the firm.
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