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Cohort Effects in Wages and Promotions

Dec 2007
Working Paper
07-025
By  Illoong Kwon, Eva Meyersson Milgrom
This paper studies the long-term effect of business cycle, employment rate and employment growth rate, at the time workers enter the labor market on later wages and promotions. Using Swedish employer-employee match data, we find that workers who enter the labor market during a recovery phase of a business cycle (when the employment rate is still low but employment growth is high) receive higher-than-average wages in the long-run. However, these long-term effects on wages are almost entirely driven by the differences in promotion speeds between cohorts. Workers starting in a recovery period are hired into slightly lower ranks, but are promoted at a higher speed than comparable workers during a contraction period. Simple theoretical models based on downward rigidity of wages and promotions, long-term contract, or stigma cannot explain a broad pattern of our findings, but models based on human capital, matching, and cyclical hiring can.