Individual Wage Growth: The Role of Industry Experience

• Date: 01 January 2016
• Published date: 01 January 2016
• DOI: http://doi.org/10.1111/irel.12125

Individual Wage Growth: The Role of Industry

Experience*

MICHELE BATTISTI

This paper focuses on the effect of experience within an industry on wages. I use

a correlated random effects simultaneous equation model that allows individual

and match heterogeneity to affect wages, job tenure, and industry experience.

I estimate my model separately for men and women using a large panel of young

Italian workers for the years 1986–2004. Results show that wage returns to indus-

try experience are much higher than wage returns to job seniority. The hypotheses

of exogeneity of job seniority and industry experience in the wage equation are

rejected: high-wage workers and high-wage matches last longer.

Introduction

There is strong evidence that wages increase throughout the working life of

individuals. In particular, studies as far back as Becker (1962) and Mincer

(1974) find that wages increase across firm tenure. This has been viewed as

evidence that firm-specific human capital is important for wage growth. At the

same time, workers tend to benefit from job mobility in terms of wage growth

(see for example Bartel and Borjas 1982; Topel and Ward 1992). Taken

together, this suggests that both human capital accumulation and match quality

considerations are important in the wage-determination process: Workers learn

useful skills as they keep their jobs longer and work longer in the same indus-

try, but can also benefit from finding a better match by moving more.

*The author’saffiliation is Ifo Institute for Economic Research at the University of Munich, Munich, Ger-

many. Email: battisti@ifo.de.

JEL: J31, J62.

The author would like to thank Simon Woodcock for invaluable help and suggestions, as well as two

anonymous referees for their great comments; Benoit Dostie and Jennifer Hunt for extremely helpful advice

on earlier versions of this work; and Stan Panis, who developed the software aML together with late Lee

Lillard, for help and support. Researchers at the LABORatorio R. Revelli (Moncalieri, Turin, Italy) and in

particular Claudia Villosio and Roberto Quaranta were of great help with the dataset and assistance during

the author’s work as a visiting researcher. The author would also like to acknowledge the participants in the

2009 Comparative Analysis of Enterprise Micro Data CAED Conference (Tokyo), the 2009 CEA conference

(Toronto), the 2009 IZA Summer School (Buch am Ammersee, Germany), the 2011 AIEL Conference (Mi-

lan) and 2011 EALE Conference (Paphos, Cyprus) for feedback and discussions. Financial support by the

Leibniz Association (SAW-2012-ifo-3) is gratefully acknowledged. All remaining errors are the author’s.

INDUSTRIAL RELATIONS, Vol. 55, No. 1 (January 2016). ©2015 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

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A more recent literature, inspired by McCall (1990) and by Neal (1999),

recognizes that firm switches are not homogeneous, and that occupations and

sectors are also important dimensions to look at. Parent (2000) and

Kambourov and Manovskii (2009) estimated wage returns to industry experi-

ence, addressing the possible endogeneity of job seniority and sector experi-

ence in a wage equation with an instrumental variable strategy. They found

industry experience to be important for wage determination, while also finding

wage returns to firm tenure to be very small or negative. However, Pavan

(2011) developed a novel search model showing that the IV technique previ-

ously utilized might underestimate the importance of firm tenure, and found

larger structural estimates of the wage effects of firm tenure.

In this paper I estimate the effect of labor-market experience, industry expe-

rience, and firm tenure on wages, allowing individual unobserved heterogene-

ity to affect wages and mobility of workers, taking account of the critique of

Pavan (2011). While empirically complex, quantifying the role of firm tenure

and industry experience for wage growth is important for researchers and poli-

cymakers alike. It sheds light on the role of different types of human capital

for wages and tenure, and on the role of mobility on life-cycle earnings. For

policymakers, knowing the “rewards”of tenure and industry experience is

valuable when creating policies concerning labor market mobility, contracts,

and compensation levels. In particular, allowing for a separate role of industry

experience can be informative for the relative earnings losses associated with

different labor-market transitions. For example, public policy might consider

targeted interventions for displaced workers employed in shrinking sectors.

In order to evaluate the wage effects of industry experience, I estimate a three-

equation simultaneous random effects model, for females and males separately.

The model consists of a wage equation and two hazard equations for job and

industry employment durations. To estimate this model I use administrative data

from a large sample of young Italian workers (I chose to focus on young workers

so that I can observe all of their labor market history within my dataset) from the

Worker Histories Italian Panel (WHIP) dataset for the years 1986–2004. To the

best of my knowledge, this paper offers the first estimate of the returns to indus-

try experience using Italian panel data. Although I am unable to reproduce the

definition of a “career”used in Pavan (2011) because of data limitations, I

believe my results can be informative when compared to those of this literature. I

find industry experience to be important for wage determination: Wage returns to

industry experience for male workers is over twice as large as returns to job

seniority (7.5 percent for 10 years, compared to 2.6 percent). This implies that

mobility across sectors is associated with a much larger wage penalty than mobil-

ity within the same economic sector. Returns to labor market experience domi-

nate the effects of industry experience and of job tenure (29 percent for the first

Wage Growth and Industry Experience /41