The Signaling Role of Promotions: Further Theory and Empirical Evidence

[Excerpt] An extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium-sized firm in the financial-services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal

Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions

Applying a simultaneous-equations estimation approach that accounts for both worker and firm behavior, I show that six alternative promotion models can be empirically distinguished to a greater extent than previously thought. I show that classic tournaments, market-based tournaments, and performance standards can be sharply distinguished when promotions induce worker effort. I also show that market-based tournaments with effort choices can be sharply distinguished from those with human capital investments. A key insight is that an empirical test can be based on the “opposing responses” property whereby workers and firms adjust their choice variables in opposite directions when the stochastic component of worker performance changes. Finally, I propose a new approach – also requiring simultaneous equations – for empirically distinguishing between classic tournaments and market-based tournaments with human capital investments, showing that the two models differ in their predictions regarding the average wage between job levels.tournaments; promotions; relative performance; internal promotion competitions; wage spreads; tests of tournament theory

The Labor Market Effects of Employer Recruitment Choice

[Excerpt] I analyze employer recruitment decisions using a dynamic, discrete-choice structural model that I estimate on a sample of clerical workers from the MCSUI, a large cross section of establishments in 4 metropolitan areas of the U.S. In the model, employers choose either informal recruitment methods (which generate a small but select applicant pool from which the employer can hire quickly) or formal methods (which create a large but less select applicant pool which the employer must screen intensively, delaying hiring times). I study the effects of 3 counterfactual simulations on recruitment strategies, starting wages, and vacancy durations: a wage subsidy, a policy designed to improve information about prospective matches, and an increase in the heterogeneity of prospective matches. I show that the effects of exogenous policy or environmental changes can be decomposed into “pure wage effects” that affect the wage offers employers post, holding constant their recruitment strategies, and “recruitment-wage effects” that involve changes in recruitment methods. The results show that changes in recruitment strategies represent an important channel through which changes in the economic environment affect the starting wages and vacancy duration for new hires

The signaling role of promotions: Further theory and empirical evidence

An extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium sized firm in the financial services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal.signaling theory; promotions; asymmetric information

Internal hiring or external recruitment?

Hiring is one of a firm’s most important decisions. When an employer fills a vacancy with one of its own workers (through promotion or lateral transfer), it forgoes the opportunity to fill the position with a new hire from outside the firm. Although both internal and external hiring methods are used, firms frequently have a bias favoring insiders. Internal and external hires differ in observable characteristics (such as skill levels), as do the employers making each type of hiring decision. Understanding those differences helps employers design and manage hiring policies that are appropriate for their organizations

New Evidence on Gender Difference in Promotion Rates: An Empirical Analysis of a Sample of New Hires

Using a large sample of establishments drawn from the Multi-City Study of Urban Inequality (MCSUI) employer survey, we study gender differences in promotion rates and in the wage gains attached to promotions. Several unique features of our data distinguish our analysis from the previous literature on this topic. First, we have information on the wage increases attached to promotions, and relatively few studies on gender differences have considered promotions and wage increases together. Second, our data include job-specific worker performance ratings, allowing us to control for performance and ability more precisely than through commonly-used skill indicators such as educational attainment or tenure. Third, in addition to standard information on occupation and industry, we have data on a number of other firm characteristics, enabling us to control for these variables while still relying on a broad, representative sample, as opposed to a single firm or a similarly narrowly-defined population. Our results indicate that women have lower probabilities of promotion and expected promotion than do men but that there is essentially no gender difference in wage growth with or without promotions.

ILR Impact Brief – Gender, Promotion, and Raises: Sometimes the Advantage Goes to Men

Prior studies looking at gender discrimination in the workplace, in the form of promotions and/or raises, have yielded mixed results. Research focusing on promotions has found that women are promoted less often than men, more often than men, and at equal rates. Research assessing both promotions and wages, grounded in the notion that promotions signal a status change that warrants additional compensation, has also produced no consensus on outcomes. This particular study, however, used unique data on recently hired workers at a broad sample of companies that enabled the authors to control for workers’ job performance, educational attainment, and other characteristics, as well as company characteristics such as profit/not-for-profit status, industry, establishment size, and percent of the workforce covered by a union contract in order to analyze gender differences in actual and expected promotions and accompanying wage gains

Was the disinflation of the early 1980's anticipated?

Inflation (Finance)

Job Characteristics and Labor Market Discrimination in Promotions: New Theory and Empirical Evidence

[Excerpt] We present new theory and the first empirical test of promotion discrimination models based on job assignment signaling. In our theory, promotions serve as signals of worker ability, and job hierarchies differ in the degree to which tasks vary across hierarchical levels. When tasks differ substantially across levels, the opportunity cost (in terms of foregone output) of not promoting qualified workers from a disadvantaged group (e.g. racial minorities or females) is large, so employers are less likely to (inefficiently) retain such workers in lower-level jobs. Thus, given performance in the pre-promotion job, the extent to which disadvantaged workers have lower promotion probabilities than advantaged workers should decrease when tasks vary more across hierarchical levels. Also, the difference between the favored and disfavored groups in the wage increase attached to promotion should diminish when tasks vary more across hierarchical levels. We test these implications empirically for the case of racial discrimination in promotions, using personnel data from a large U.S. firm and also data from the National Compensation Survey. We find strong empirical support for the theoretical model’s predictions concerning promotion probabilities, whereas empirical support is mixed for the model’s predictions concerning the wage growth attached to promotions