Productivity, Seniority and Wages: New Evidence from Personnel Data

Abstract

Wages may be observed to increase with seniority because of firm-specific human capital accumulation or because of self-selection of better workers in longer jobs. In both these cases, the upward sloping wage profile in cross-sectional regressions would reflect higher productivity of more senior workers. If this were true, the observation of an effect of seniority on wages would depend on the presence of controls for individual productivity. In this paper we replicate, using personnel data from a large Italian firm, the results of the pioneering work of Medoff and Abraham [Quarterly Journal of Economics (1980); The Journal of Human Resources, 15(2) (1981)] in which supervisors' evaluations were used as productivity indicators. Since the validity of supervisors' evaluations as measures of productivity has been widely criticised, we extend the work of Medoff and Abraham using different direct measures of productivity based on recorded absenteeism and misconduct episodes. Both these indicators and supervisors' evaluation suggest that the observed effect of seniority on wages does not reflect a higher productivity of more senior workers. Only at the lowest levels of the firm's hierarchy, the human capital theory contributes to explain the effect of seniority on wages. At least at all other levels, the explanation of the observed upward sloping profile has to be based on theories in which wages are deferred for incentive or insurance reasons.