Performance, seniority, and wages: formal salary systems and individual earnings profiles

This paper replicates studies by Medoff and Abraham Quart. J. Eco. 95 1980 703; J. Hum. Res. 16 1981 186] and Flabbi and Ichino Lab. Eco. 8 2001 359] using personnel data from the Dutch national aircraft manufacturer Fokker. It shows how a formal salary system, as is widely used by large firms, brings about that seniority-wage profiles are largely independent of controls for reported performance in cross-sectional wage regressions even though supervisors' evaluations shape life-cycle earnings profiles. Performance ratings determine how fast a worker climbs the firm's career and wage ladder. The paper also reveals that real wage growth depends on the employer's prosperity, and it demonstrates that formal salary systems cause serial correlation in wage growth and “Green Card” effects.