Wage Growth and Returns to Tenure in Italy

Michele Battisti
Simon Fraser University, Canada

This paper develops a simple model of the labour market with search frictions, and where job duration is endogenous. It allows us to distinguish the relative importance of different categories of human capital and delivers testable predictions regarding how returns to experience and job tenure can shed light on the relative importance of these different categories of human capital. We then test the main implications of the model by estimating the returns to experience and job tenure using an empirical model that estimates wages and job duration simultaneously, accounting for the potential endogeneity of seniority in wage determination. The application uses the full version of the WHIP (Work Histories Italian Panel) dataset. This is a panel dataset comprising a random sample of the population of Italian workers in the private sector for the years 1985-2004. This dataset has not been used for this research purpose to this date. We present result for the duration and earnings equations for females and males separately, and test the null hypothesis that seniority is exogenous by testing correlation of person and match random effects in the wage equations and in the hazard model for employment duration. We easily reject the null hypothesis. The first two years on the job are associated with a two percent yearly wage increase. The returns to tenure are very small afterwards. Preliminary results not included in this version suggest that this effect is primarily driven by tenure in the sector.

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