Productivity, seniority and wages: new evidence from personnel data

Wages may be observed to increase with seniority because of firm-specific h uman 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 wor kers. If this were true, the observation of an effect of seniority on wages would depend on the presence of controls for individual productivity. In t his 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 s upervisors' evaluations were used as productivity indicators. Since the val idity of supervisors' evaluations as measures of productivity has been wide ly criticised, we extend the work of Medoff and Abraham using different dir ect measures of productivity based on recorded absenteeism and misconduct e pisodes. Both these indicators and supervisors' evaluation suggest that the observed effect of seniority on wages does not reflect a higher productivi ty of more senior workers. Only at the lowest levels of the firm's hierarch y, the human capital theory contributes to explain the effect of seniority on wages. At least at all other levels, the explanation of the observed upw ard sloping profile has to be based on theories in which wages are deferred for incentive or insurance reasons. (C) 2001 Elsevier Science B.V. All rig hts reserved.