Starting Wages Respond To Employer's Risk

Peter Berkhout, Joop Hartog and Hans van Ophem
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Peter Berkhout: EIB Amsterdam
Joop Hartog: University of Amsterdam
Hans van Ophem: University of Amsterdam

No 09-071/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Firms hiring fresh graduates face uncertainty on the future productivity of workers. Theory suggests that starting wages reflect this, with lower pay for greater uncertainty. We use the dispersion of exam grades within a field of education as an indicator of the unobserved heterogeneity that employers face. We find solid evidence that starting wages are lower if the variance of exam grades is higher and higher if the skew is higher: employers shift the cost of productivity risk to new hires, but pay for the opportunity to catch a really good worker. Estimating the extent of risk cost sharing between firm and worker shows that shifting to workers is larger in the market sector than in the public sector and diminishes with experience.

In press: Scottish Journal of Political Economy .

Keywords: wages; risk compensation; ability; incomplete information (search for similar items in EconPapers)
JEL-codes: J31 (search for similar items in EconPapers)
Date: 2009-08-06
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20090071

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