Many empirical studies have demonstrated that seniority and tenure have substantially greater effects on earnings in Japan than in the UK or US, which may reflect a greater emphasis on training and thus account in part for Japan's remarkable growth performance since World War II. In Discussion Paper No. 974, Research Associate Giorgio Brunello and Kenn Ariga note that earnings may alternatively rise with tenure simply because good matches last longer. If this is the case, conventional estimates of earnings profiles based on cross-section data with unobserved heterogeneity of worker, job and/or match quality may be biased. If the size of this bias varies substantially across countries, comparative evidence on tenure effects may be misleading. Unobserved worker-, job- and match-specific information may be inferred, however, from firms' allocation of workers to jobs and training to workers both internally and in the market-place. If `better' workers are assigned to jobs requiring more sophisticated skills and greater responsibility, their `rank' will provide information on both their own quality and the quality of their match, which can be used to construct an unbiased estimator of tenure effects.

Brunello and Ariga use such a framework to verify that earnings profiles are indeed steeper in Japan than in the UK, but less so than those estimated using the conventional approach suggest. Decomposing them into unconditional effects of tenure and those conditional on rank indicates that the latter are substantial. Both conditional and unconditional seniority premiums are much larger in banking and finance than in manufacturing for the UK, while inter-industry differences are much milder in Japan. The ratio of unconditional to conditional tenure effects, which measures the relative importance of between-rank and within-rank earnings growth, is also larger in the UK. Brunello and Ariga note that problems of comparability in their data and unmeasured institutional differences caution against drawing strong conclusions from their comparative results, but earnings profiles clearly differ across both countries and industries. In `occupational' labour markets, such as the UK, wages are rates for the job, while in `internal' labour markets, such as Japan, earnings follow incremental scales based on seniority.

Earnings and Seniority in Japan. A Re-appraisal of the Existing Evidence and a Comparison With the UK
Giorgio Brunello and Kenn Ariga

Discussion Paper No. 974, June 1994 (HR)