Wage Dynamics and Promotions Inside and Between Firms

This paper studies the process of wage dynamics and promotions inside and betwen firms using large linked employer-employee data set for the Portuguese economy. The main question is if promotions are the result of gained work experience or of learning by the worker and the firm about the ability of the worker. We use the Gibbons and Waldman (1999) framework to distinguish between the case of full information and the case of symmetric learning by the worker and the firm. The theoretical predictions are that under full information after controlling for worker’s fixed effect, there is (1) no serial-correlation in wage increases; (2) wage increases do not predict promotions and (3) there is no serial correlation in promotions. Under symmetric learning these correlations are present even after controlling for worker’s fixed effect. We emphasize the dynamics of the process taking into account the unobserved heterogeneity and endogeneity problems using appropriate GMM techniques. The serial correlation in wage increases and the serial correlation in promotions is analysed considering state dependence and controlling for individual unobserved heterogeneity. This enable us to assess how important are past wage increases and past promotions, ruling out the hypothesis of the state dependence be caused by worker’s time-invariant unobserved characteristics that consistently makes the individual get higher wage increases or higher chances of being promoted. Preliminary evidence support the hypothesis of serial correlation in wage increases, serial correlation in promotion and wage increases predictor of promotion, which supports the existence of learning. JEL: M5, J6, L2.