Unemployment Risk and Wage Differentials

Roberto Pinheiro, Ludo Visschers

Research output: Working paperDiscussion paper

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.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages28
Publication statusPublished - Sep 2014

Publication series

NameESE Discussion Papers
No.250

Keywords

  • layoff rates
  • unemployment risk
  • wage differentials
  • unemployment scarring
  • J31
  • J63

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