The Signaling Role of Promotions: New Evidence from European Firms

Abstract

Using large-scale, nationally-representative, worker and firm-level panel datasets from Finland and Germany, and inferring time-varying, job-specific worker performance measures from bonus data, we provide new empirical evidence supporting the signaling role of promotions. Controlling for performance, promotion probabilities are increasing in educational attainment whereas wage increases from promotion are decreasing in educational attainment for some educational groups, with both results stronger for first than for subsequent promotions. Women have lower promotion probabilities than men, though this difference dissipates after first promotions. Evidence of promotion signaling is stronger for within-firm than for across-firm promotions.