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The Provision of Wage Insurance by the Firm: Evidence from a Longitudinal Matched Employer-Employee Dataset

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Author Info
Ana Rute Cardoso () (IZA Bonn, University of Minho and CEPR)
Miguel Portela () (Tinbergen Institute, NIPE-University of Minho and IZA Bonn)

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Abstract

We evaluate the impact of product market uncertainty on workers wages, addressing the questions: To what extent do firms provide insurance to their workforce, insulating their wages from shocks in product markets? How does the amount of insurance provided vary with firm and worker attributes? We use a longitudinal matched employer-employee dataset of remarkable quality. The empirical strategy is based on Guiso et al. (2005). We first estimate dynamic models of sales and wages to retrieve consistent estimates of shocks to firms' sales and to workers’ earnings. We are then able to estimate the sensitivity of wages to permanent and transitory shocks to firm performance. Results point to the rejection of the full insurance hypothesis. Workers’ wages respond to permanent shocks to firm performance, whereas they are not sensitive to transitory shocks. Managers are not fully insured against transitory shocks, while they receive the same protection against permanent shocks as workers in other occupations. Firms with higher variability in their sales, and those operating in different industries, offer more insurance against permanent shocks. Comparison with Guiso et al. (2005) indicates that Portuguese firms provide less insurance than Italian firms, corroborating evidence on the high degree of wage flexibility in Portugal.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1865.

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Length: 26 pages
Date of creation: Nov 2005
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Handle: RePEc:iza:izadps:dp1865

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Related research
Keywords: product market uncertainty; wage shocks; risk sharing; wage insurance;

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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References listed on IDEAS
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    Other versions:
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  21. Abowd, John M & Lemieux, Thomas, 1993. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 983-1014, November. [Downloadable!] (restricted)
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  23. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 37-50, January. [Downloadable!] (restricted)
  24. Ana Rute Cardoso, 1999. "Firms' wage policies and the rise in labor market inequality: The case of Portugal," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 53(1), pages 87-102, October.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gábor Kátay, 2008. "Do Firms ProvideWage Insurance Against Shocks? – Evidence from Hungary," MNB Working Papers 2008/8, Magyar Nemzeti Bank (The Central Bank of Hungary). [Downloadable!]
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