Tenure Profiles and Efficient Separation in a Stochastic Productivity Model.

This paper provides a new way of analyzing tenure profiles in wages, <p> by modelling simultaneously the evolution of wages and the distribution <p> of tenures. Starting point is the observation that within-job log wages for <p> an individual can be described by random walk. We develop a theoretical <p> model based on efficient bargaining, where both log outside wage and log <p> wage in the current job follow a random walk. This setting allows the <p> application of real option theory. We derive the efficient separation rule, <p> which stipulates that workers switch jobs when the difference between the <p> outside wage and the wage in the current job reaches a threshold. The <p> model fits well the observed distribution of job tenures. Since we observe <p> outside wages only at job start and job separation, our empirical analysis <p> of within job wage growth is based on expected wage growth conditional <p> on the outside wages at both dates. Our modelling allows testing of the <p> efficient bargaining hypothesis. The model is estimated on the PSID.