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Job Security as an Endogenous Job Characteristic

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Author Info
Jahn, Elke J. () (Department of Economics, Aarhus School of Business)
Wagner, Thomas () (University of Applied Sciences)

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Abstract

This paper develops a hedonic model of job security (JS). Workers with heterogeneous JS-preferences pay the hedonic price for JS to employers, who incur labor-hoarding costs from supplying JS. In contrast to the Wage-Bill Argument, equilibrium unemployment is strictly positive, as workers with weak JS-preferences trade JS for higher wages. The relation between optimal job insecurity and the perceived dismissal probability is hump-shaped. If firms observe demand, but workers do not, separation is not contractible and firms dismiss workers at-will. Although the workers are risk-averse, they respond to the one-sided private information by trading wage-risk for a higher JS. With two-sided private information, even JS-neutral workers pay the price for a JS guarantee, if their risk premium associated with the wage-replacement risk is larger than the social net loss from production.

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Publisher Info
Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 08-6.

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Length: 50 pages
Date of creation: 01 Apr 2008
Date of revision:
Handle: RePEc:hhs:aareco:2008_006

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Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 486396
Fax: +45 8615 5175
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Related research
Keywords: job security; hedonic market; implicit contract theory; guaranteed employment contract; severance pay contract; asymmetric information; prudence;

Find related papers by JEL classification:
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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References listed on IDEAS
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  1. Elke Jahn & Thomas Wagner, 2005. "Contractual Employment Protection and the Scarring Risk of Unemployment," IZA Discussion Papers 1813, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Stephen Nickell & Patricia Jones & Glenda Quintini, 2002. "A Picture of Job Insecurity Facing British Men," Economic Journal, Royal Economic Society, vol. 112(476), pages 1-27, January. [Downloadable!] (restricted)
    Other versions:
  3. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Kahn, Charles M, 1985. "Optimal Severance Pay with Incomplete Information," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 435-51, June. [Downloadable!] (restricted)
  5. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb.. [Downloadable!] (restricted)
  6. Hart, Oliver D, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies, Blackwell Publishing, vol. 50(1), pages 3-35, January. [Downloadable!] (restricted)
  7. Rogerson, Richard & Schindler, Martin, 2002. "The welfare costs of worker displacement," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1213-1234, September. [Downloadable!] (restricted)
  8. Gottschalk, Peter & Moffitt, Robert, 1999. "Changes in Job Instability and Insecurity Using Monthly Survey Data," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages S91-126, October. [Downloadable!] (restricted)
  9. Ramey, Garey & Watson, Joel, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 873-911, August.
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  10. Charles F. Manski, 2004. "Measuring Expectations," Econometrica, Econometric Society, vol. 72(5), pages 1329-1376, 09. [Downloadable!] (restricted)
  11. Kimball, Miles S & Weil, Philippe, 2003. "Precautionary Saving and Consumption Smoothing Across Time and Possibilities," CEPR Discussion Papers 4005, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  13. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September. [Downloadable!] (restricted)
    Other versions:
  14. Alois Stutzer & Rafael Lalive, 2004. "The Role of Social Work Norms in Job Searching and Subjective Well-Being," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 696-719, 06. [Downloadable!] (restricted)
    Other versions:
  15. Philip Oreopoulos & Marianne Page & Ann Huff Stevens, 2005. "The Intergenerational Effect of Worker Displacement," NBER Working Papers 11587, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Valletta, Robert G, 1999. "Declining Job Security," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages S170-97, October. [Downloadable!] (restricted)
    Other versions:
  17. Page, Marianne & Stevens, Ann & Oreopoulos, Philip, 2005. "Intergenerational Effects of Worker Displacement," Working Papers 05-21, University of California at Davis, Department of Economics. [Downloadable!]
  18. Weil, Philippe, 1992. "Equilibrium asset prices with undiversifiable labor income risk," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 769-790. [Downloadable!] (restricted)
    Other versions:
  19. Francis Green, 2003. "The Rise and Decline of Job Insecurity," Studies in Economics 0305, Department of Economics, University of Kent. [Downloadable!]
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