Unemployment risk and wage differentials

Roberto Pinheiro, Lodewijk Visschers

Research output: Contribution to journalArticlepeer-review


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 o 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.
Original languageEnglish
Pages (from-to)397-424
JournalJournal of Economic Theory
Early online date29 Jan 2015
Publication statusPublished - May 2015


  • Layoff Rates
  • Unemployment risk
  • Wage Differentials
  • Unemployment Scarring
  • Job Security

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