Equilibrium Wage-Tenure Contract with Unobserved Human Capital

This paper develops an equilibrium job search model in which the employed worker privately accumulates human capital and continually searches for a better paying job. The firm cannot observe the level of human capital of the worker nor the job search outcome. In order to induce truthful revelation on the level of human capital, the firm offers a menu of contracts with different lifetime values conditioning on the worker’s output. Given the lifetime value, the firm back-loads some portion of wage payments to discourage potential job turnover and extract more surplus from early leavers. In this environment, wage grows due to job-to-job transition, human capital accumulation (productive promotion), and the strategic back-loading scheme (non-productive promotion). We estimate the model using indirect inference to investigate the effect of human capital accumulation on individual wage growth. In the NLSY79 data, the average wage of white male high school graduates after 20 years of market experience is 1.88 times larger than the average of the first full-time wages. A counterfactual analysis using the structural parameter estimates shows that if a typical worker were not able to accumulate human capital, his wage would grow by 41.8%. JEL Classification: D82, E24, J31, J41 ∗I deeply thank Rasmus Lentz for his guidance. I would also like to thank John Kennan, Yongseok Shin, and Chris Taber for their comments. Xiaodong Fan, Tim Huegerich, Soohyun Oh, and Yuya Takahashi also deserve special recognition. This paper has substantially benefited from frequent discussions with them. Sang Yoon Lee and Michael Rapp helped revise my writing. I am also grateful to seminar participants at the University of Wisconsin-Madison and University of Wisconsin-Whitewater. All remaining errors are mine.