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The Price of Security: On the Causality and Impact of Lay-off Risks on Wages

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  • Stefan Arent
  • Wolfgang Nagl

    ()

Abstract

We examine the impact of lay-off risks on wages. Portfolio as well as search theoreticmodelling predicts higher exogenous lay-off risks to go along with higher wages. But,an impact of wages on lay-off risks (e.g., endogenous job destruction) is also plausible.Using the German BA Employment Panel (2008), we estimate a wage equation withexogenous lay-off risks for the most important industries in West Germany. We addressthe mutual causality by controlling for endogeneity via an instrumental variableapproach. Furthermore, we restrict our analysis to the high skilled to avoid a highimpact on tariff commitment. Our findings suggest the presence of risk premiums inthree of five industries. The level of impact and its significance depends on the industryand on the gender of the employee.

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Bibliographic Info

Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 100.

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Date of creation: 2011
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Handle: RePEc:ces:ifowps:_100

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Keywords: Lay-off risk; wages;

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  1. Wright, Randall D, 1987. "Search, Layoffs, and Reservation Wages," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 5(3), pages 354-65, July.
  2. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 241-53, April.
  3. Moretti, Enrico, 2000. " Do Wages Compensate for Risk of Unemployment? Parametric and Semiparametric Evidence from Seasonal Jobs," Journal of Risk and Uncertainty, Springer, Springer, vol. 20(1), pages 45-66, January.
  4. Moore, Michael J, 1995. "Unions, Employment Risks, and Market Provision of Employment Risk Differentials," Journal of Risk and Uncertainty, Springer, Springer, vol. 10(1), pages 57-70, January.
  5. Joop Hartog & Erik Plug & Luis Diaz Serrano & Jose Vieira, 2003. "Risk compensation in wages – a replication," Empirical Economics, Springer, Springer, vol. 28(3), pages 639-647, July.
  6. John Abowd & Orley Ashenfelter, 1980. "Anticipated Unemployment, Temporary Layoffs and Compensating Wage Differentials," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 517, Princeton University, Department of Economics, Industrial Relations Section..
  7. Ernesto Villanueva, 2007. "Estimating Compensating Wage Differentials Using Voluntary Job Changes: Evidence from Germany," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, ILR Review, Cornell University, ILR School, vol. 60(4), pages 544-561, July.
  8. Fitzenberger, Bernd & Schnabel, Reinhold & Wunderlich, Gaby, 2001. "The gender gap in labor market participation and employment: a cohort analysis for West Germany," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 01-47, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Bas Jacobs & Joop Hartog & Wim Vijverberg, 2009. "Self-selection bias in estimated wage premiums for earnings risk," Empirical Economics, Springer, Springer, vol. 37(2), pages 271-286, October.
  10. Li, Elizabeth H, 1986. "Compensating Differentials for Cyclical and Noncyclical Unemployment: The Interaction between Investors' and Employees' Risk Aversion," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 4(2), pages 277-300, April.
  11. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  12. Borjas, George J. & Sueyoshi, Glenn T., 1994. "A two-stage estimator for probit models with structural group effects," Journal of Econometrics, Elsevier, Elsevier, vol. 64(1-2), pages 165-182.
  13. Burdett, Kenneth & Mortensen, Dale T, 1980. "Search, Layoffs, and Labor Market Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(4), pages 652-72, August.
  14. Viscusi, W Kip, 1978. "Wealth Effects and Earnings Premiums for Job Hazards," The Review of Economics and Statistics, MIT Press, vol. 60(3), pages 408-16, August.
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