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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 04 de 2009


Rent Seeking at Plant Level: An Application of the Card-de la Rica Tenure Model to

Workers in German Works Councils

John T. Addison
Department of Economics, University of South Carolina, Queen’s University Belfast,
and GEMF, University of Coimbra

Paulino Teixeira
Faculty of Economics/GEMF, University of Coimbra

Thomas Zwick
Munich School of Management, Ludwig-Maximilians University Munich,
and Centre for European Economic Research/ZEW, Mannheim
Low-skilled workers enjoy a large wage advantage in German works council establishments. Since job tenure is also longer for these workers, one explanation might be rent-seeking. If the premium is a compensating wage differential (or a return to unmeasured ability), it should not lead to higher tenure; whereas if it is (partly) rent, lower quits should lead to longer tenure at plants with works councils. Our analysis uses the Card and de la Rica (2006) tenure model, and although the association between skill level and the works council tenure gap is positive it fails to achieve statistical significance in a single equation framework. However, running the tenure equation for separate skill quintiles, we find that those with the highest wage premium have the greatest tenure. As a result, although we cannot be certain that the works council wage mark-up of low-skilled workers is necessarily a non-competitive rent, the observed pattern of job tenure across different skill subsamples is not after all inconsistent with rent-seeking behavior.

JEL Classification: J31, J50.

Keywords: works councils, rent seeking, matched employer-employee data, wages, job tenure.

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