1. Institut für Arbeitsmarkt- und Berufsforschung In the Right Place at the Wrong Time The Role of Firms and Luck in Young Workers’ Careers Till von Wachter, Columbia University and IZA Stefan Bender, Institute for Employment Research (IAB)

2. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung First Job may be very important in determining the long term career development. It is difficult to estimate the long-run impact of early labor market experience, because - not only worker differ and firms choose among them, - firms differ as well (sorting into firm at initial hiring). Topics of the talk: - long-term effects of an early job loss, - role of firms in the process of early job mobility, - how data on firms can be used for understand job and wage dynamics of young workers. Introduction

3. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Long-Term Effects of Early Displacements? Displaced Worker Studies: Data: NLSY (Kletzer & Fairlie 2001, Gustafson 1998) Approach: compare wage changes of movers and stayers Results: After 5 years, significant loss in earnings of 10-15% Issue - Potential Biases: Negative Selection: Displaced workers least able Initial Assignment: Workers sort by firms’ turnover rates Positive Selection: Voluntary mobility

4. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Apprentice Training in Germany POSITIVE SELECTION NEGATIVE SELECTION POSITIVE SELECTION NEGATIVE SELECTION

5. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung A Statistical Model of Young Workers’ Wages wage loss ability involuntary mover dummy voluntary mover dummy mobility status only D i0 is observed

6. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung individual ability average ability at training firm because only D i0 is observed

7. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Wage Determination and Theories of Job Mobility Adverse Selection (Gibbons/Katz 1991; Greenwald 1986): Displacement may be perceived as a negative signal about a worker by other employers. Implies that movers are likely to be the least able workers within a firm. Negative Selection: least able workers are moving overestimate effect of moving

8. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Wage Determination and Theories of Job Mobility Sorting: –If less able workers are hired by firms with higher turnover rates, then movers and stayers are not comparable across different types of firms. –Firms with lower turnover rates offer better career opportunities. Sorting across firms: workers with low ability are moving overestimate effect of moving

9. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung If one observes a fully informative pre-displacement wage, the bias from perfect initial sorting or negative selection can be eliminated by analyzing wage changes (for example Jacobson, Lalonde, Sullivan 1993). Might not be a good strategy for young workers: Young workers receive training wages that are below their ability levels. If there is asymmetric information between employers about workers´ ability pre-displacement wages do not reflect productivity (Gibbons and Katz 1993). Firms and workers themselves only gradually learn about their abilities and preferences. More able workers should leave less attractive firms once their ability becomes known. Wage Determination and Theories of Job Mobility

10. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Wage Determination and Theories of Job Mobility Voluntary Job Mobility (Topel and Ward 1992): Is an important feature of early careers in the U.S. Early mobility plays an important role in other countries as well (for Germany: Euwals and Winkelmann 2001). Positive selection: voluntary mobility underestimate effect of job loss

11. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Model captures potential biases of OLS regression of w it on D i0 : Negative Selection: least able workers are moving overestimate effect of moving Sorting across firms: workers with low ability are moving overestimate effect of moving Positive selection: voluntary mobility underestimate effect of job loss

12. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Need Alternative Estimates of Wage Differences Two tired strategy: - It uses firm fixed effects to control for systematic differences of workers between firms. Thereby, non- displaced workers at the same training firm function as a comparision group. - It uses firms´ retention rates of other young graduates finishing apprenticeship in the same year as a displaced worker as an instrument for the probability of a displacement.

13. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Need Alternative Estimates of Wage Differences (1)Firm Fixed Effects – Change Comparison Group OLS: all movers compared with all stayers - we have discussed OLS already OLSFE: compare movers to stayers at same training firm - including training firm fixed effects - takes care of initial sorting

14. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Need Alternative Estimates of Wage Differences (2)IV: Fraction of Movers Among Other Graduates at Same Firm as Instrument IV- Level of the fraction as an instrument; puts more weight on workers moving from high turnover firms IVFE- Deviations of firms‘ retention rates of young workers from the firm specific average: workers moving due to temporarily high turnover IVFE2- Workers moving from firms with high exit rates into non-employment

15. Institut für Arbeitsmarkt- und Berufsforschung German Data and Institutions the employment statistics register base is the integrated notification procedure for the health, pension and unemployment insurance (  freelancers, self employed persons and civil servants are not included) notifications have to be submitted to the social security agencies at least once a year notifications include for example information about  employees‘ entries and exits  gender, qualification and current occupation (3-digit)  gross daily precise wages (including all bonus payments)  an unique plant identifier and the industry code  since 1999: regional information each person has an unique identifier (social insurance number)

16. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung German Data and Institutions Main Apprentice Sample: Graduates from 1992-1994 5 years of potential labor market experience Basic restrictions: min duration of training, participation in dual system, no prior work experience, West Germany only Substantial Restriction on firm and program size: at least 50 employees and 5 annual graduates Minimal restrictions on real log daily wages, LF participation

17. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Wage Effects of Moving Out of Training Firm - Full Sample Wage­ Difference by Year of Raw Differences OLS with Controls OLS only Firm Fixed Effects IV without IV with Firm Fixed Effects Firm Fixed Effects Experience(1)(2)(3)(4)(5) 1st Year-0.094-0.065 -0.121-0.108 (0.0038)(0.0029)(0.0025)(0.0077)(0.026) 3rd Year-0.093-0.071-0.064-0.108-0.035 (0.0011) (0.0028)(0.0071)(0.0203) 5th Year-0.092-0.072-0.063-0.0980.009 (0.0011) (0.0030)(0.0075)(0.0221) T-Statistics H0: 1=3-0.74.1-0.8-3.4-3.6 H0: 3=5-0.10.5-0.8-3.4-3.5 H0: 3=5-1.33.7-1.2-5.0-4.7 Notes: The dependent variable is the log real daily wage. Standard errors clustered at the establishment level are in parentheses. All Regression have worker, firm, and training variables as well as experience*cohort and occupation dummies. Each regression has 991,004 observations and 13,009 establishments.

18. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung OLS and IV Estimates of Effect of Moving From Training Firm, With and Without Firm Fixed Effects - Main Sample Low Wage Difference Experience 135

19. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Implications of Estimates for Models of Job Mobility 1.Initial Assignment Matters - firm fixed effects reduce wage differences:OLSFE > RAW -IV in levels increase wage differences:IV < RAW 2. Job Search Matters - ‘random’ move bigger initial effect:IVFE1 <<RAW -‘random’ move no long-term effect:IVFE5 ~ 0 3. Negative Selection -> Initial Assignment Not Perfect - firm fixed effects alone not enough:OLSFE < 0

20. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Open Questions: Training Quality, LM Indicators & The Role of Firms Indicators of labor market attachment Amount of job, industry and occupation changes (in comparison to previous firm/ industry/ occupation) Time spent in employment, unemployment and out of labor force (i.e. self-employment, maternity, military) in days per potential experience year Role of firm characteristics for mobility (for example size, average wage) with Katja Görlitz (RWI, Essen)

21. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung BACKUP

22. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Basic Characteristics at End of Training – Part 1 All Graduates 1992-94 Workers With Valid Wage Observations By Mobility Status at Graduation Stayers Movers Average Age at End of Training20.9 21.0 Fraction Male0.870.880.86 Fraction Training Duration >2Years0.830.840.81 Cohort 19920.370.390.34 Cohort 19930.32 0.33 Cohort 19940.300.280.34 Observations295653177855117798

23. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Basic Characteristics at End of Training – Part 2 All Graduates 1992-94 Workers With Valid Wage Observations By Mobility Status at Graduation StayersMovers Fraction Moving At End of Training0.4001 Average Fraction Movers Among other Apprentices 0.40 (0.30) 0.28 (0.23) 0.59 (0.30) Average Training Firm Annual Employment Growth -0.03 (0.30) -0.02 (0.30) -0.05 (0.29) Fraction High School Degree0.170.180.15 Training Firm Size 500+0.540.560.50 Average Log Training Wage3.91 (0.30) 3.96 (0.30) 3.85 (0.29) Average Log Real Daily Wage (Time Variying) 4.88 (0.26) 4.92 (0.23) 4.80 (0.29)

24. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Conclusions: Effects of Job Loss and Early Mobility Role of Initial Assignment and Frictions Initial sorting matters: differences in firms’ turnover rates Job search matters: voluntary mobility is high Negative selection: adverse selection? No Persistent Effects Controlling for potential biases show initially large but temporary effects of early mobility Have to address stepwise sorting and selection process when studying job and wage mobility of young workers

25. LoWER 2006 Institut für Arbeitsmarkt- und Berufsforschung Open Questions: Training Quality & The Role of Firms Are retention rates correlated with differences in training quality?  Distinguish initial assignment from differences in training  Permanent effects from choice of training firm What do large firms do: Are there internal labor markets?  Use data for multiple firms to evaluate internal markets  Cohort effects within firms: Selection at entry?

26. Institut für Arbeitsmarkt- und Berufsforschung - individual data on employment are added by unemployment notifications - the federal unemployment register contains for example information about  start and end of each benefit notification  reason for submitting the notification  type and amount of the benefit  age, gender, nationality, childs (yes/no), married (yes/no)  both kind of data can be integrated; single notifications are appended to the (un-)employment histories of persons each person has an unique identifier (social insurance number) German Data and Institutions Josh Rouse - "Subtitulo