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Unobserved Individual and Firm Heterogeneity in Wage and Job-Duration Functions: Evidence from German Linked Employer–Employee Data


Address for correspondence: Olaf Hübler, Institute of Empirical Economics, Leibniz University Hannover, Königsworther Platz 1, 30167 Hannover, Germany. Tel.: +49 511 762 4794; Fax: +49 511 762 8297; e-mail:


Abstract. We analyse the correlations between individual and firm fixed effects, and wage and job-duration functions. Our results for large firms suggest that low-wage firms tend to be stable firms, suggesting that lower wages can buy job stability. Furthermore, high-wage workers sort into the stable low-wage firms. Our interpretation is that high-wage workers have a higher wage to insure against job loss and can afford more easily to forgo wages in favour of job stability. This may provide an explanation of the puzzle identified in previous literature that high-wage workers are matched to low-wage firms.

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