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This paper analyzes labor market responses to productivity shocks when firms set employment criteria on the basis of the likelihood of hiring high or low productivity workers. In response to a positive productivity shock, firms do not raise the criterion as much as the shock, increasing the proportion of low productivity workers among the employed. The observed average productivity may respond negligibly even if employment changes substantially. Interest rate fluctuations can yield an opposite relation between productivity and employment, explaining the weak empirical relationship.

This chapter studies the negative signals associated with nonpromotion. I first show theoretically that, when workers' productivity rises little with additional years on the same job level, the negative signal associated with nonpromotion leads to wage decreases. On the other hand, when additional job-level tenure leads to a sizable increase in productivity, workers' wages increase. I then test my model's predictions using the personnel records from a large US firm from 1970–1988. I find a clear hump-shaped wage-job-tenure profile for workers who stay at the same job level, which supports my model's prediction.

This chapter studies the consequences of firm delayering on wages and the wage distribution inside firms. I consider a market-based tournament model with asymmetric information to endogenize firms’ delayering decisions. My model predicts that when the CEO becomes more productive, firms grow in size. When the CEO becomes sufficiently productive, firms delayer. After delayering, wages at all levels rise and the wage gap between the CEO and the laborers widens. These predictions capture the dynamic process of firms’ structure and size changes and match a set of empirical findings in recent studies that are not well explained by existing theories.

We formulate static and dynamic empirical models of promotion where the current promotion probability depends on the hierarchical level in the firm, individual human capital, unobserved individual specific attributes, time-varying firm-specific variables, as well as endogenous past promotion histories (in the dynamic version). Within the static versions, we investigate the relative influence of the key determinants of promotions and how these influences vary by hierarchical levels. In the dynamic version of the model, we examine the causal effect of past speed of promotion on promotion outcomes. The model is fit on an eight-year panel of 30,000 American executives employed in more than 300 different firms. The stochastic process generating promotions may be viewed as a series of promotion probabilities which become smaller as an individual moves up in the hierarchy and which are primarily explained by unobserved heterogeneity and promotion opportunities. Firm variables and observed human capital variables (age, tenure, and education) play a surprisingly small role. We also find that, conditional on unobservables, the promotion probability is only enhanced by the speed of promotion achieved in the past (a structural fast track effect) for a subset of the population and is negative for the majority. In general, the magnitude of the individual-specific effect of past speed of promotion is inversely related to schooling, tenure, and hierarchical level.