Unemployment risk and wage differentials

Pinheiro, Roberto B. and Visschers, Ludo (2012): Unemployment risk and wage differentials.

Abstract

Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical, and firms differ, but do so only in offered job security (the probability that the worker is not sent into unemployment). In a setting where workers search on and off the job, wages paid increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. As a result, unemployment spells become persistent for low-wage and unemployed workers, a seeming pattern of ‘unemployment scarring’, that is created entirely by firm heterogeneity alone. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Unemployment risk, Wage Differentials, Unemployment Scarring
• Subjects: J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J63 - Turnover ; Vacancies ; Layoffs; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

References

[1] Abowd, J. M. and O. Ashenfelter (1981): "Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials", in: Rosen, S., ed., Studies in Labor Markets , University of Chicago Press;

[2] Abowd, J. M., R. H. Creecy and F. Kramarz (2002): "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data", mimeo;

[3] Akerlof, G. and B. Main (1980): "Unemployment Spells and Unemployment Experience", American Economic Review, 70(5), 885-893;

[4] Albrecht, J. and S. Vroman (2002): "A Matching Model with Endogenous Skill Requirements", Interna- tional Economic Review, 43(1), 283-305;

[5] Arai, M. and F. Heyman (2001): "Wages, Profit and Individual Employment Risk: Evidence from matched worker-firm data.", FIEF working paper;

[6] Arulampalam, W., Booth, A.L., and Taylor, M.P. (2000): "Unemployment persistence", Oxford Economic Papers, 52(1), 24-50;

[7] Boheim, R. and M. P. Taylor (2002): "The search for success: do the unemployed find stable employment?", Labour Economics, 9, 717-735;

[8] Brugemann, B. (2008): "Empirical Implications of Joint Wealth Maximizing Turnover", mimeo;

[9] Burdett, K. and D.T. Mortensen (1980): "Search, Layoffs, and Market Equilibrium" Journal of Political Economy, 88, 652-672;

[10] Burdett,K. and D.T. Mortensen (1998): "Wage Differentials, Employer Size and Unemployment", International Economic Review, 39, 257-273;

[11] Carneiro, A. and P. Portugal, "Wages and the Risk of Displacement", in Polachek, S. and K. Tatsiramos (ed.): Work, Earnings and Other Aspects of the Employment Relation (Research in Labor Economics, Volume 28), pp.251-276

[12] Coles, M. (2001): "Equilibrium Wage Dispersion, Firm Size, and Growth", Review of Economic Dynamics,4 (1), 159-187;

[13] Davis, S., Haltiwanger, J. and S. Schuh (1996): Job Creation and Job Destruction, MIT Press;

[14] Eliason, M. and D. Storrie (2006): "Lasting or Latent Scars? Swedish Evidence on the Long-Term Effects of Job Displacement", Journal of Labor Economics, 24(4), 831-856;

[15] Evans, D. and L. S. Leighton (1989): "Why Do Smaller Firms Pay Less", Journal of Human Resources,24(2), 299-318;

[16] Farber, H. and R. Gibbons (1996): "Learning and Wage Dynamics", Quarterly Journal of Economics, 111(4), 1007-1047;

[17] Hwang, H., D. Mortensen and W. Reed (1998): "Hedonic Wages and Labor Market Search", Journal of Labor Economics, 16 (4), 815-847;

[18] Heckman, J.J. (2001): "Micro data, heterogeneity, and the evaluation of public policy: Nobel lecture", Journal of Political Economy, 109(4), 673–748;

[19] Idson, T. L. and W. Y. Oi (1999): ”Firm Size and Wages” in Ashenfelter, O. and D.Card (eds.): Handbook of Labor Economics, Volume 3(B), 2165-2214;

[20] Jovanovic, B. (1979): "Job Matching and the Theory of Turnover", Journal of Political Economy, 87(5), 972-990;

[21] Jovanovic, B. (1982): "Selection and the evolution of Industry", Econometrica, 50(3), 649-670;

[22] Jovanovic, B. (1984): "Matching, Turnover, and Unemployment", Journal of Political Economy, 92(1), 108-122;

[23] Mayo, J. W. and M. N. Murray (1991): "Firm size, employment risk and wages: further insights on a persistent puzzle", Applied Economics, 23, 1351-1360;

[24] Moretti, E. (2000): "Do Wages Compensate for Risk of Unemployment? Parametric and Semiparametric Evidence from Seasonal Jobs", Journal of Risk and Uncertainty, 20 (1), 45-66;

[25] Mortensen, D.T. (1990): "Equilibrium Wage Distributions: A Synthesis" in Hartog,J., G. Ridder, and J. Theeuwes (eds.), Panel Data and Labor Market Studies, Amsterdam: North Holland;

[26] Moscarini, G. (2005 ): "Job Matching and the Wage Distribution", Econometrica, 73(2), 481-516

[27] Moscarini, G. and F. Postel-Vinay (2010 ): "Stochastic Search Equilibrium", Cowles Foundation Discussion Paper 1754, Oct. 2010

[28] Neal, D. (1998): "The Link between Ability and Specialization: An Explanation for Observed Correlations between Wages and Mobility Rates ", Journal of Human Resources, 33(1), 173-200;

[29] Pinheiro, R. and L. Visschers (2006): "Job Security and Wage Differentials", mimeo;

[30] Postel-Vinay, F. and J.-M. Robin (2002a): “The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counter-Offers”, International Economic Review, 43 (4), 989-1016;

[31] Postel-Vinay, F. and J.-M. Robin (2002b): “Wage Dispersion with Worker and Employer Heterogeneity”, Econometrica, 70(6), 2295-2350;

[32] Rubinstein, Y. and Y. Weiss (2006): "Post Schooling Wage Growth: Investment, Search and Learning" in Hanushek, E. and F. Welch (eds.): Handbook of the Economics of Education, Vol. 1, 1-67;

[33] Ruhm, C. (1991): "Are Workers Permanently Scarred by Job Displacements?", American Economic Review, 81(1), 319-324;

[34] Salop, J. and S. Salop (1976): "Self-Selection and Turnover in the Labor Market", The Quarterly Journal of Economics, 90(4), 619-627;

[35] Salvanes, K. G. (2005): "Employment policies at the plant level: Job and Worker Flows for heterogeneous Labour in Norway", mimeo;

[36] Stevens, A.H. (1997): "The importance of multiple job losses", Journal of Labor Economics, 15(1),165-188;

[37] Stewart, M.B. (2007): "The inter-related dynamics of unemployment and low pay", Journal of Applied Econometrics, 22(3), 511–531

[38] Topel, R. (1993): "What have we learned from Empirical Studies of Unemployment and Turnover?", American Economic Review P&P, 83(2), 110-115;

[39] Wang, R. and A. Weiss (1998): "Probation, layoffs, and wage-tenure profiles: A sorting explanation", Labour Economics, 5(3), 359-383;

[40] Winter-Ebmer, R. (2001): "Firm Size, Earnings and Displacement Risk", Economic Inquiry, 39, 474-486;

[41] Winter-Ebmer, R. and J. Zweimuller (1999): "Firm Size Wage Differentials in Switzerland: Evidence from Job Changers", American Economic Review P&P, 89, 89-93.