Do Firms Provide Wage Insurance against Shocks?

Gábor Kátay

Scandinavian Journal of Economics, 2016, vol. 118, issue 1, 105-128

Abstract: Implicit contract models imply that it is Pareto optimal for risk-neutral firms to provide insurance to risk-averse workers against shocks. Using a matched employer–employee dataset, I evaluate wage responses to both permanent and transitory shocks in Hungary, and compare my results to similar studies on Italian, Portuguese, German, and French datasets. I find that the magnitude of the wage response differs depending on the nature of the shock. Broadly speaking, the wage response to permanent shocks is twice the size of the response to transitory shocks. Unlike previous findings, my results show that full insurance against transitory shocks is rejected.

Date: 2016
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