Sebastian Buhai’s Research in Economics

Research Profile

I am primarily a Labor Economist and Microeconometrician, with further, eclectic, interests in theoretical or empirical modeling tools more typical of Finance, Game Theory, Industrial Organization, and Social Networks. Thematically, most of my research to date studies labor market-type phenomena revolving around, e.g., human capital accumulation and dynamics of worker careers; bargaining, rent-sharing, and wage formation; persistent wage and employment inequality; incentive pay schemes; firm performance, investment in (in)tangibles, and employee outcomes. Methodologically, my research expertise is particularly developed in relation to: noncooperative game theory, real option theory, and search & matching theoryespecially applied in labor market contexts; theoretical and applied dimensions of cross-sectional and panel-data econometrics.

Research Output

Publications (peer-reviewed)

Returns to Tenure or Seniority? (with Miguel Portela, Coen Teulings and Aico van Vuuren), March 2014, Econometrica, 82 (2), pages 705–730, DOI: 10.3982/ECTA8688 . See also the corresponding Web Appendix or the old July 2009 version (includes theory framework)

This study documents two empirical facts using matched employer-employee data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm. Second, workers’ wages rise with seniority, where seniority is defined as a worker’s tenure relative to the tenure of his colleagues. Controlling for tenure, the probability of a worker leaving the firm decreases with seniority. The increase in expected seniority with tenure explains a large part of the negative duration dependence of the separation hazard. Conditional on ten years of tenure, the wage differential between the 10th and the 90th percentile of the seniority distribution raises is 1.1-1.4 percentage points in Denmark and 2.3-3.4 in Portugal.
Keywords: wage dynamics, tenure, seniority, Last-In-First-Out
J31, J41, J63

Tenure Profiles and Efficient Separation in a Stochastic Productivity Model (with Coen Teulings), May 2014, Journal of Business and Economic Statistics, 32:2, pages 245-258, DOI:10.1080/07350015.2013.866568 . See also the corresponding Web Appendix or the accepted, non-gated, November 2013 version. NB. This paper had a 2nd R&R at the Review of Economic Studies earlier.

We develop a theoretical model based on efficient bargaining, where both log outside productivity and log productivity in the current job follow a random walk. This setting allows the application of real option theory. We derive the efficient worker-firm separation rule. We show that wage data from completed job spells are uninformative about the true tenure profile. The model is estimated on the PSID. It fits the observed distribution of job tenures well. Selection of favourable random walks can account for the concavity in tenure profiles. About 80% of the estimated wage returns to tenure is due to selectivity in the realized outside productivities.
Keywords: random productivity growth, efficient bargaining, job tenure, inverse gaussian, wage-tenure profiles, option theory

JEL-codes: C33, C41, J31, J63

How Productive is Workplace Health and Safety? (with Elena Cottini and Niels Westergaard-Nielsen), forthcoming at the Scandinavian Journal of Economics (accepted in December 2015), DOI:10.1111/sjoe.12184. See also the corresponding Online Appendix.

This paper investigates the causal impact of workplace health and safety practices on firm performance, using Danish longitudinal matched employer-employee data merged with unique cross-sectional representative firm survey data on work environment conditions. We estimate standard production functions, augmented with workplace environment indicators, addressing both time-invariant and time-varying potentially relevant unobservables in the production process. We find positive and large productivity effects of improved physical dimensions of the health and safety environment (specifically, “internal climate” and “repetitive and strenuous work”).
Keywords: occupational health and safety, work environment, firm performance, production function estimation
JEL codes: C33, C36, D24, J28, L23

Downloadable working papers

A Social Network Analysis of Occupational Segregation (with Marco van der Leij), latest version Oct 2014; current stage: in revision

We develop a network model of occupational segregation between social groups divided along gender or racial dimensions, generated by the existence of positive assortative matching among individuals from the same group. If referrals are important for job search, then expected homophily in the structure of job contact networks induces different career choices for individuals from different social groups. This further translates into stable occupational segregation equilibria in the labor market. We derive conditions for wage and unemployment inequality in the segregation equilibria and characterize both 1st and 2nd best social welfare optima. Surprisingly, we find that utilitarian socially optimal policies always involve segregation, but that additional distributional concerns can justify integration policies.
Keywords: Social Networks, Homophily, Occupational Segregation, Labor Market Inequality, Social Welfare
JEL codes: J24, J31, J70, Z13

Firm downsizing, public policy, and the age structure of employment adjustments (with Hans-Martin von Gaudecker), latest version Oct 2015; current stage: in revision.

This paper studies the structure of workforce adjustments when firms facing adverse demand conditions are offered public financial incentives for downsizing. In particular, we are interested in how the age composition of employee outflows is shaped by corresponding age-dependent institutional arrangements. Our simple labour demand framework, with stochastic product demand and firing costs heterogenous in workers’ early retirement eligibility, has as core prediction that distressed firms will dismiss with predilection those employees eligible to retire early. We test the model’s implications on the entire set of mass layoff events in larger Danish private firms over 1980-2001, period covering several reforms to the early pension system. Our empirical conclusion is that that firms behave as predicted by our model with regards to their lower-educated workforce, but not towards their higher-educated employees. We conjecture that an extension of our baseline firm-level model to narrow within-firm employee categories with potentially asymmetric turnover responses to firm-level demand shocks can rationalize this finding.
Keywords: early retirement, labour demand, employment adjustment, mass layoffs, LEED
JEL-codes: H32, H55, J26, J65

Work in Progress (plus some temporarily abandoned projects)

  • Job Hazard Premia and Worker Risk Preferences (with Elena Cottini); stage: presentation mode; draft available soon.

We provide a fresh analysis of the theory of compensating wage differentials (CWD) using rich data on self-reported work environment conditions and worker risk attitudes, from a representative 5-wave (1990-2010, 5-year spaced) panel survey of workers, which we link to the Danish register, longitudinal, yearly, matched employer-employee data. Our study improves and extends previous CWD empirical analysis in several ways: a) in standard hedonic wage equations, we control for both individual and firm-specific time-invariant unobserved heterogeneity; we also report spell-first-difference estimates where workers report changes in work conditions within the same job spell; b) we account for worker heterogeneity in attitudes towards health/ safety risks, from information on workers’ smoking habits and on their being parents of young children; c) we compare results in a) and b) with alternative results obtained by estimating the workers marginal willingness to pay for job amenities from their job separation hazards. For a), we find that the only work environment conditions compensated for by hourly wage premia, in the order of 4-6%, are related to flexibility in the working time (“shift premia”), namely “working in irregular shifts”, “working in the evening” and “working at night”. If we account for the selection of workers in hazardous jobs based on the observed worker risk proxies and time-invariant worker unobservables, we find negative selection of risk-lovers into shift-jobs, with sizable hourly wage premia of 18-26%, while positive or no selection, and no compensation, in other types of hazard work. Finally, shift-jobs CWD estimates based on the worker’s employment history have magnitudes in between those at a) and b). We rationalize our results via a parsimonious model of job hazard premia and worker risk profiles.

  • Performance Pay, Wage Dispersion, and Job Separation (with Miguel Portela); stage: presentation mode; draft available soon.

We investigate the effects of performance pay (PP) on individual wage growth, within and between-firm earnings inequality, and worker-firm separation, using exhaustive Portuguese linked employer-employee longitudinal data for 1986-2007. This is the first economy-wide study in the incentive compensation literature attempting to account for the endogenous compensation policy of firms and for endogenous selection of workers across PP and non-PP firms. In our empirical analysis we are able to control for both unobserved worker and unobserved firm specific heterogeneity, and to proxy for the firm’s costs of switching across PP and non-PP regimes. Inter alia, emphasis is placed on the determinants, effects, and dynamics of managerial incentive pay and turnover. We rationalize our findings by means of an extended Lemieux, MacLeod and Parent (2009, QJE) model.

  • Worker-Firm Dynamics with Seniority Bargaining (with Coen Teulings and Miguel Portela); stage: presentation mode; draft available soon.

We provide microfoundations for worker seniority (a worker’s tenure relative to the tenure of all her co-workers at the firm) as natural bargaining device in large firms with stochastic product demand and irreversible firm-specific investments required for each newly hired worker. The firm and its workers simultaneously bargain for layoff order and wage schedule, whereupon infra-marginal senior workers get wage premia and layoff insurance. Buhai et al (2014, ECTA) have already shown empirically that wages increase and job exit hazard decreases with seniority, on exhaustive linked-employer-employee-data from Denmark and Portugal. Using the same data, and econometric methodology adapted from both Buhai and Teulings (2014, JBES) and Buhai et al (2014, ECTA), we argue that the seniority profile in wages is a proxy for the return to the extent of worker-firm specific investments.

  • Employee Wage, Employer Size and Stochastic Labour Demand; stage: presentation mode
  • A Real Options Theory of Labor Turnover
  • Business Cycles and the Age Structure of Labour Adjustments. Structural Framework and Empirical Assessment (with Hans-Martin von Gaudecker)
  • Disentangling Labor Adjustment Costs (with Miguel Portela)
  • Recovering wage offer and employee productivity distributions in search models: an empirical investigation using Danish data (with Jesper Bagger)
  • Estimation of an Equilibrium Model of Firm Dynamics (with Julien Prat)
  • On Labour Market Transitions under Efficient Bargaining and Idiosyncratic Productivity Shocks (with Dimitris Pavlopoulos)
  • Structural Estimation of a Two-Sided Matching Employer-Employee Model (with Daniele Condorelli)
  • Peer Group Effects and College Choice (with Marisa Hidalgo Hidalgo)
  • Experimental Evidence on Fairness among Workers (with Jens Grosser)

Published Dissertations & Scientific Reports

Essays on Labour Markets: Worker-Firm Dynamics, Occupational Segregation and Workplace Conditions (digital version accessible via the EUR online repository), PhD Thesis 2008, Erasmus University Rotterdam/ Tinbergen Institute, published as book by Thela Thesis -Academic Publishing Services, in the Tinbergen Institute Research Series (no. 431), Amsterdam, The Netherlands; November 2008

Wages, Seniority and Separation Rates in a Stochastic Productivity Model: A Comparative Perspective, MPhil Thesis 2003, Tinbergen Institute, published as monograph by the Lumen Publishing House (Editura Lumen), Iasi, Romania; February 2006

Quantile Regression: Overview and Selected Applications, Ad-Astra Journal (Young Romanian Scientists’ Journal), Vol. 4, 2005

Note on Panel Data Econometrics, Netherlands Network of Economics (NAKE) “Nieuws”, 15 (2), December 2003

Selected unpublished work from my graduate student days (surveys, reports, course papers, etc.)

On Risk in Educational Choice: Brief Overview and Research Note, December 2003

Investigating Reciprocal Motivation in Experimental Labor Markets, June 2003

Incomplete Contracts and the Theory of the Firm, January 2003

Job Search and Contact Networks, April 2002

* For research publications in other fields than Economics see my CV page; you can check out also the list of courses followed during my graduate programs at the Tinbergen Institute, with (non-updated) links to their instructors’ webpages (for external summer schools and workshops, see corresponding section in my extended CV).