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Wage Formation and Recurrent Unemployment

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  • Ragui Assaad

    (University of Minnesota)

  • Insan Tunali

    (Koc University)

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    Abstract

    Examination of cross-section data on non-contractual construction workers in Egypt reveals strong attachment to the sector despite extreme demand instability. Also present are statistically significant wage differentials between construction trades that cannot be attributed to differential costs of skill acquisition. These observations suggest that employers might be compensating their non-contractual workforce for recurrent unemployment so that they can rely on a steady supply of qualified workers. We rely on a static labor supply model and investigate the theoretical consequences of rationing, turnover, and randomness in employment and unemployment durations. Assuming that the risk- averse worker would demand an expected utility which is at least as high as the reservation utility provided in the unconstrained sector, we derive structural expressions that quantify the anticipated and unanticipated components of compensation for employment risk. To test the model we use data from two rounds of the labor force surveys conducted in 1988. The first data set allows us to construct trade-specific measures of risk based on information on individual spells of employment and unemployment. The second allows us to estimate a restricted version of our model based on quarterly information on aggregate unemployment experiences of the workers. We find strong evidence that workers are compensated for the anticipated component and weak evidence that they are compensated for the unanticipated component. The estimated magnitudes reveal that employers provide only partial compensation against recurrent unemployment.

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1623.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1623

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    References

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    1. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
    2. Hutchens, Robert M, 1983. "Layoffs and Labor supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 37-55, February.
    3. Moore, Michael J, 1995. "Unions, Employment Risks, and Market Provision of Employment Risk Differentials," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 57-70, January.
    4. Hatton, Timothy J. & Williamson, Jeffrey G., 1991. "Unemployment, employment contracts, and compensating wage differentials: michigan in the 1890s," The Journal of Economic History, Cambridge University Press, vol. 51(03), pages 605-632, September.
    5. repec:fth:harver:1464 is not listed on IDEAS
    6. John M. Abowd & Orley C. Ashenfelter, 1981. "Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials," NBER Chapters, in: Studies in Labor Markets, pages 141-186 National Bureau of Economic Research, Inc.
    7. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 500-522, October.
    8. Assaad, Ragui, 1997. "Kinship ties, social networks, and segmented labor markets: evidence from the construction sector in Egypt," Journal of Development Economics, Elsevier, vol. 52(1), pages 1-30, February.
    9. Deaton, Angus & Meullbauer, John, 1981. "Functional Forms for Labor Supply and Commodity Demands with and without Quantity Restrictions," Econometrica, Econometric Society, vol. 49(6), pages 1521-32, November.
    10. Daniel S. Hamermesh & John R. Wolfe, 1986. "Compensating Wage Differentials and the Duration of Wage Loss," NBER Working Papers 1887, National Bureau of Economic Research, Inc.
    11. Noel Gaston & Randall Wright, 1991. "The effects of risk on efficient labor contracts," Finnish Economic Papers, Finnish Economic Association, vol. 4(1), pages 2-9, Spring.
    12. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
    13. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
    14. Tunali, Insan & Assaad, Ragui, 1992. "Market Structure and Spells of Employment and Unemployment: Evidence from the Construction Sector in Egypt," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 339-67, Oct.-Dec..
    15. Price V. Fishback, 1998. "Operations of "Unfettered" Labor Markets: Exit and Voice in American Labor Markets at the Turn of the Century," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 722-765, June.
    16. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
    17. Assaad, R. & Tunali, I., 1997. "Wage Formation in the Construction Sector in Egypt," Papers 1997/28, Koc University.
    18. Gibbons, R. & Katz, L., 1989. "Does Unmeasured Ability Explain Inter-Industry Wage Differences," Working papers 543, Massachusetts Institute of Technology (MIT), Department of Economics.
    19. 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, vol. 4(2), pages 277-300, April.
    20. Newey, Whitney K., 1984. "A method of moments interpretation of sequential estimators," Economics Letters, Elsevier, vol. 14(2-3), pages 201-206.
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