Keywords: Firm survival, firm size, employee turnover, firm specific human capital.
Abstract: Labor market outcomes such as turnover and earnings are correlated with employer
characteristics, even after controlling for observable differences in worker characteristics.
We argue that this systematic relationship constitutes strong evidence in favor
of models where workers choose how much to invest in future productivity. Because
employer characteristics are correlated with firm survival, returns to these investments
vary across firm types. We describe a dynamic general equilibrium model where workers
employed in firms more likely to survive choose to devote more time to productivity
enhancing activities, and therefore have a steeper earnings-tenure profile. Our model
also predicts that quit rates should be lower in firms more likely to survive, and should
tend to fall during slow times, while job destruction rates should rise. These predictions,
we argue, are borne out by the existing empirical evidence.
Full paper (294 KB PDF)
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Last update: May 18, 2005