Do Initial Conditions Persist Between Firms? An Analysis of Firm-Entry Cohort Effects and Job Losers using Matched Employer-Employee Data

Influential studies have suggested that initial conditions can have persistent effects on workers’ careers within firms. It is a longstanding question among economists whether such lasting wage differentials among firms and industries are due to persistent deviations of wages from workers’ skills due to contracting and market frictions, or whether they arise from permanent differences among workers’ skills. However, there is currently little representative evidence on firm-entry cohort effects and few explicit tests of alternative explanations. We use information on the universe of workers from a large German manufacturing sector from matched employer-employee records to show that firm-entry cohort effects are a pervasive phenomenon for the firms we study. The cohort effects we estimate are highly heterogeneous across firms and slowly fade over time. We also find that wage premiums on the past job are lost at job displacement, and that initial positive effects on wage levels at the new job fades over time. This suggests that at least part of firm-entry cohort effects arise from transitory rents, and that initial effects from previous wages fade as workers’ search for better jobs. 1 We would like to thank David Card, Bob Gibbons, Larry Katz and conference participants at CAED 2006 in Chicago and CAFE 2006 in Nürnberg for helpful suggestions. Ana Rute-Cardoso provided helpful comments. This paper was written as part of the research project “Discrepancies between Market and Firm Wages: An Analysis of Earnings and Worker Mobility” within the DFG research program “Flexibility in Heterogenous Labor Markets" (SSP 1169). All errors are our own.