1 Introduction
The question of how wages are determined is central to the study of labor economics. To date,
the empirical literature on this topic has focused on factors such as the return to interfirm mo-
bility on the part of workers (Bartel and Borjas (1981), Neal (1999), Topel and Ward (1992)),
the covariance structure of earnings across workers and firms (Topel and Ward (1992), Par-
ent(1995)), and inter-industry and firm-size wage differentials (Krueger and Summers (1988),
Gibbons and Katz (1992), Abowd, Kramarz and Margolis (1999)). Thus far, little empiri-
cal work has been done on questions relating to the assignment of workers to jobs and the
resulting effects on the evolution of intra-firm wage structures and mobility within the firm.
Previous studies on the relationship between wages and careers in organizations present results
specific to one or a few firms which, while suggestive, can not easily be generalized to firms
beyond the type analyzed (Doeringer and Piore (1971), Chiappori, Salanie and Valentin(1999),
Baker, Gibbs and Holmstrom (1994 a,b)). Empirical studies on the structure of wages and
mobility within firms using large data sets have not related the analysis to a formal theoretical
framework (McCue (1996)).
This paper presents an empirical study of the common features characterizing wage and
mobility dynamics within firms. The analysis is based on the theoretical framework of Gibbons
and Waldman (1999) in which the determination of wages depends on how workers’ ability are
evaluated within a job rank, given a hierarchical structure of job levels within firms where each
job rank has different skill requirements. The model specifies a wage equation integrating the
elements of human capital accumulation, job assignment based on comparative advantage and
learning about unobserved worker ability to explain the dynamics of wages and promotions
inside firms. The objective of this paper is to implement empirically the Gibbons and Wald-
man model and perform the estimation over a large sample of firms in order to test whether
comparative advantage and learning are important determinants of the wage policies of firms.
In addition, estimating the model on the sample of workers remaining with their firm and com-
paring the results to those obtained from the sample that includes firm changers allows one to
distinguish between firm specific effects and individual specific effects transferable across firms
in the analysis of the wage dynamics.
The estimation is performed using GMM techniques applied to the longitudinal data from
the German GSOEP over the period 1986-1996. This survey is uniquely appropriate for the
analysis of intra-firm mobility and wage dynamics because it provides information on hier-
archical job levels within occupations through a question asking specifically about the rank