Unemployment Risk and Wage Differentials

Roberto Pinheiro and Ludo Visschers

No 2015-44, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

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 only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous, increasing with the rent received by a worker in his job, and depending on the behavior of all firms in the labor market. We solve for the labor market equilibrium and find that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

Keywords: Layoff Rates; Unemployment risk; Wage Differentials; Unemployment Scarring (search for similar items in EconPapers)
Date: 2014-09
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Related works:
Journal Article: Unemployment risk and wage differentials (2015)
Working Paper: Unemployment Risk and Wage differentials (2015)
Working Paper: Unemployment Risk and Wage Differentials (2014)
Working Paper: Unemployment Risk and Wage Differentials (2013)
Working Paper: Unemployment Risk and Wage Differentials (2013)
Working Paper: Unemployment Risk and Wage Differentials (2013)
Working Paper: Unemployment risk and wage differentials (2012)
Working Paper: Unemployment risk and wage differentials (2012)
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