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Bias in estimating returns to tenure: The impact of monopsony power

Year: 2024

Type: article

Abstract: This note revisits the bias in returns to tenure estimates (RTT) that arises when firmemployment and wages comove through firm-specific (FS) wage shocks - shocks towages that likely occur in the presence of monopsony power(MP). In an earlier paper,Snell et al. (2018), found that adding firm-year fixed effects to a Mincer regression forworkers in a small sample of firms in German and Portuguese panel data raised theestimated RTT schedules by about 30%. Here we re-examine the sign and magnitudeof this bias using the universe of workers in Portugal. We find the bias remains negativeand large. We then split the data into low and high labour market concentration firmsto examine the role MP plays in these results. We find that the RTT bias arising fromFS wage shocks is larger in firms with high MP than low MP. The results reinforcethe need to control for FS wage shocks in RTT estimation exercises especially where comparisons across workers in different firms are made.

Source: Economics Letters

DOI: 10.1016/j.econlet.2024.112105

Authors: Andy Snell, Jonathan P. Thomas, Pedro Martins

Institutions: University of Edinburgh, Universidade Nova de Lisboa

Language: English

Topic: Labor market dynamics and wage inequality

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $2,980