The Effects of Macroeconomic Changes on Labor Market Mobility, Job Stability, and Returns to Tenure in Germany

In recent years, the German labor market has shifted towards lower unemployment but a larger share of temporary employment. This decrease in job stability has been actively discussed in the German public. For decades, empirical labor economists have studied the returns to tenure as a measure of the benefits from job stability, but the available empirical evidence is mixed.

Our research project will apply a structurally estimated search model of the German labor market to analyze the effects of institutional and technological changes in the macroeconomic environment on human capital accumulation, worker mobility, job stability, wage dynamics, in particular, returns to tenure. Our approach aims at bridging the gap between macroeconomic theory and empirical labor economics. If returns to tenure are high, a higher level of job stability may be preferable even if it comes at the expense of a more rigid labor market. Policy prescriptions crucially depend not only on identifying the extent of returns to tenure but also on understanding its linkages to worker mobility. Our structural modelling approach enables us to pinpoint these linkages. It sheds light on previous results and will enable us to study general equilibrium feedback effects from changes in the macroeconomic environment. Specifically, the objectives of the proposed research project are threefold:

First, we develop and estimate a structural general equilibrium model of the German labor market using micro data on employment and wage histories. The model has a demographic structure, endogenous wage dynamics, job search decisions, voluntary separations, and involuntary layoffs.

Second, we will use the model to guide the empirical analysis on the returns to tenure. Our approach of estimating the returns to tenure combines a structural search model with estimation strategies from the treatment-control paradigm widely used in the empirical literature investigating the costs of displacement. We will simulate employment and wage histories in the presence and absence of tenure accumulation to inform us about the returns to tenure. By comparing counterfactual histories we will account for the opportunity costs of foregone search while accumulating tenure. This fills a gap in existing estimators.

Third, we will use the general equilibrium framework to contribute to the debate on the effects of institutional and technological changes on human capital accumulation, worker mobility, and wage dynamics. The Hartz reforms serve as an excellent example.

Our analysis will build on the seminal contribution of Ljungqvist and Sargent (1998) on the European unemployment dilemma. Their paper stresses the importance of interactions between job instability, skill accumulation, and institutional changes. However, important features of their model remain exogenous. Instead, recent developments in search theory will allow us to endogenize wage formation and job mobility decisions in our analysis.

Prof. Dr. Philip Jung (TU Dortmund)
Prof. Dr. Moritz Kuhn (University of Bonn)

Benjamin Hartung (European Central Bank)
Edgar Preugschat (Technical University Dortmund)