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Bias in returns to tenure when firm wages and employment comove: A quantitative assessment and solution

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    Rights statement: Accepted for publication to Journal of Labor Economics on 1/12/2016 http://www.journals.uchicago.edu/doi/abs/10.1086/693867

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Original languageEnglish
Pages (from-to)47-74
JournalJournal of Labor Economics
Early online date8 Nov 2017
Publication statusPublished - Jan 2018


It is well known that unless worker-firm match quality is controlled for, reduced-form estimates of returns to firm tenure will be biased. In this paper, we show that there is a further pervasive source of bias, namely, the comovement of firm employment and firm wages. We argue that firm-year fixed effects must be used to eliminate this bias. Estimates from two large-panel data sets from Germany and Portugal show that the bias is empirically important. Finally, we show that the results extend to tenure correlates used in macroeconomics, such as the minimum unemployment rate since joining the firm.

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