IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp9578.html
   My bibliography  Save this paper

Are Starting Wages Reduced by an Insurance Premium for Preventing Wage Decline? Testing the Prediction of Harris and Holmstrom (1982)

Author

Listed:
  • Hartog, Joop

    (University of Amsterdam)

  • Raposo, Pedro

    (Universidade Catolica Portuguesa, Lisbon)

Abstract

In the model of Harris and Holmstrom (1982) workers pay an insurance premium to prevent a wage decline. As employers are unable to assess the ability of a labour market entrant, they would offer a wage equal to expected productivity of the worker's category and adjust it with unfolding information on true individual productivity. Workers are willing to accept a reduction in starting wage to prevent a reduction in their wage when their productivity is revealed to be below the expected value for their category. While Harris and Holmstrom indicate crystal clear how the prediction can be tested, their prescription has never been applied. Using Portuguese data covering virtually the entire labour force, we find that the prediction is unequivocally rejected. We interpret the results instead as confirmation of earlier results showing that workers are compensated for the financial risk of investing in an education.

Suggested Citation

  • Hartog, Joop & Raposo, Pedro, 2015. "Are Starting Wages Reduced by an Insurance Premium for Preventing Wage Decline? Testing the Prediction of Harris and Holmstrom (1982)," IZA Discussion Papers 9578, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9578
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp9578.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. John T. Addison & Pedro Portugal & Hugo Vilares, 2017. "Unions and Collective Bargaining in the Wake of the Great Recession: Evidence from Portugal," British Journal of Industrial Relations, London School of Economics, vol. 55(3), pages 551-576, September.
    2. Gottfries, Axel & Teulings, Coen, 2017. "Returns to On-the-Job Search and the Dispersion of Wages," IZA Discussion Papers 10668, Institute of Labor Economics (IZA).
    3. Hugo Reis & Paulo Guimarães & Pedro Portugal & Ana Rute Cardoso, 2018. "The returns to schooling unveiled," Working Papers w201805, Banco de Portugal, Economics and Research Department.
    4. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    5. Axel Gottfries & Coen N. Teulings, 2017. "Returns to On-The-Job Search and the Dispersion of Wages," CESifo Working Paper Series 6410, CESifo.
    6. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    7. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 921-955.
    8. Pierre-Andre Chiappori & Bernard Salanie & Julie Valentin, 1999. "Early Starters versus Late Beginners," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 731-760, August.
    9. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
    10. Paulo Guimarães & Pedro Portugal, 2010. "A simple feasible procedure to fit models with high-dimensional fixed effects," Stata Journal, StataCorp LP, vol. 10(4), pages 628-649, December.
    11. Lex Borghans & Angela Lee Duckworth & James J. Heckman & Bas ter Weel, 2008. "The Economics and Psychology of Personality Traits," Journal of Human Resources, University of Wisconsin Press, vol. 43(4).
    12. Pedro S. Martins, 2021. "30,000 Minimum Wages: The Economic Effects of Collective Bargaining Extensions," British Journal of Industrial Relations, London School of Economics, vol. 59(2), pages 335-369, June.
    13. Gottfries, Axel & Teulings, Coen, 2016. "Returns to on-the-job search and the dispersion of wages," LSE Research Online Documents on Economics 86219, London School of Economics and Political Science, LSE Library.
    14. Battisti, Michele, 2017. "High wage workers and high wage peers," Labour Economics, Elsevier, vol. 46(C), pages 47-63.
    15. Henry S. Farber & Robert Gibbons, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1007-1047.
    16. Peter Arcidiacono & Gigi Foster & Natalie Goodpaster & Josh Kinsler, 2012. "Estimating spillovers using panel data, with an application to the classroom," Quantitative Economics, Econometric Society, vol. 3(3), pages 421-470, November.
    17. Hartog, Joop, 2001. "On Human Capital and Individual Capabilities," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 47(4), pages 515-540, December.
    18. Peter Fredriksson & Lena Hensvik & Oskar Nordström Skans, 2018. "Mismatch of Talent: Evidence on Match Quality, Entry Wages, and Job Mobility," American Economic Review, American Economic Association, vol. 108(11), pages 3303-3338, November.
    19. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
    20. Pierre André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series 738, CESifo.
    21. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, March.
    22. Hugo Vilares & Pedro Portugal, 2013. "Labor unions, union density and the union wage premium," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    23. Bonin, Holger & Dohmen, Thomas & Falk, Armin & Huffman, David & Sunde, Uwe, 2007. "Cross-sectional earnings risk and occupational sorting: The role of risk attitudes," Labour Economics, Elsevier, vol. 14(6), pages 926-937, December.
    24. Polachek, Solomon W., 2008. "Earnings Over the Life Cycle: The Mincer Earnings Function and Its Applications," Foundations and Trends(R) in Microeconomics, now publishers, vol. 4(3), pages 165-272, April.
    25. Joseph G. Altonji & Ching-I Huang & Christopher R. Taber, 2015. "Estimating the Cream Skimming Effect of School Choice," Journal of Political Economy, University of Chicago Press, vol. 123(2), pages 266-324.
    26. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 315-333.
    27. Angrist, Joshua D., 2014. "The perils of peer effects," Labour Economics, Elsevier, vol. 30(C), pages 98-108.
    28. Joop Hartog, 2001. "On Human Capital and Individual Capabilities," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 47(4), pages 515-540, December.
    29. Charles F. Manski, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 531-542.
    30. repec:eee:labchp:v:3:y:1999:i:pb:p:2629-2710 is not listed on IDEAS
    31. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
    32. Abowd, John M. & Kramarz, Francis, 1999. "The analysis of labor markets using matched employer-employee data," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 40, pages 2629-2710, Elsevier.
    33. Robert Gibbons & John Roberts, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.
    34. Ana Rute Cardoso & Miguel Portela, 2009. "Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(1), pages 29-50, March.
    35. repec:eee:labchp:v:1:y:1986:i:c:p:641-692 is not listed on IDEAS
    36. Joop Hartog, 2011. "Chapter 4 A Risk Augmented Mincer Earnings Equation? Taking Stock," Research in Labor Economics, in: Research in Labor Economics, pages 129-173, Emerald Group Publishing Limited.
    37. Gottfries, A. & Teulings, T., 2017. "Returns to On-the-Job Search and the Dispersion of Wages," Cambridge Working Papers in Economics 1737, Faculty of Economics, University of Cambridge.
    38. Teulings, Coen & Gottfries, Axel, 2017. "Returns to on-the-job search and the dispersion of wages," CEPR Discussion Papers 11921, C.E.P.R. Discussion Papers.
    39. Giuseppe Moscarini, 2005. "Job Matching and the Wage Distribution," Econometrica, Econometric Society, vol. 73(2), pages 481-516, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Joop Hartog & Pedro Raposo & Hugo Reis, 2022. "Fluctuations in the wage gap between vocational and general secondary education: lessons from Portugal," Journal of Population Economics, Springer;European Society for Population Economics, vol. 35(2), pages 643-675, April.
    2. Joop Hartog & Pedro S. Raposo & Hugo Reis, 2018. "Vocational High School Graduate Wage Gap: The Role of Cognitive Skills and Firms," CESifo Working Paper Series 7075, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    2. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    3. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    4. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, December.
    5. Cassidy, Hugh & DeVaro, Jed & Kauhanen, Antti, 2016. "Promotion signaling, gender, and turnover: New theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 140-166.
    6. Axel Gottfries, 2018. "Partial commitment in models of on-the-job search with an application to minimum wage spillovers," 2018 Meeting Papers 567, Society for Economic Dynamics.
    7. Balke, Neele & Lamadon, Thibaut, 2021. "Productivity shocks, long-term contracts and earnings dynamics," Working Paper Series 2021:19, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    8. Jed DeVaro & Michael Waldman, 2012. "The Signaling Role of Promotions: Further Theory and Empirical Evidence," Journal of Labor Economics, University of Chicago Press, vol. 30(1), pages 91-147.
    9. Haaland, Venke Furre, 2013. "The Lost Generation: Effects of Youth Labor Market Opportunities on Long-Term Labor Market Outcomes," UiS Working Papers in Economics and Finance 2013/8, University of Stavanger.
    10. Catherine Haeck & Frank Verboven, 2012. "The Internal Economics of a University: Evidence from Personnel Data," Journal of Labor Economics, University of Chicago Press, vol. 30(3), pages 591-626.
    11. Murphy, Richard & Weinhardt, Felix, 2020. "Top of the Class: The Importance of Ordinal Rank," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 87(6), pages 2777-2826.
    12. Woodcock Simon D, 2010. "Heterogeneity and Learning in Labor Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-69, September.
    13. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
    14. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    15. Giacinta Cestone & Chiara Fumagalli & Francis Kramaz & Giovanni Pica, 2015. "Insurance Between Firms: The Role of Internal Labor Markets," CSEF Working Papers 386, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 22 Jan 2020.
    16. Robert Gibbons & Michael Waldman, 2006. "Enriching a Theory of Wage and Promotion Dynamics inside Firms," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 59-108, January.
    17. Neele Balke & Thibaut Lamadon, 2020. "Productivity Shocks, Long-Term Contracts and Earnings Dynamics," NBER Working Papers 28060, National Bureau of Economic Research, Inc.
    18. Christian Dustmann & Hyejin Ku & Tetyana Surovtseva, 2023. "Real Exchange Rates and the Earnings of Immigrants," The Economic Journal, Royal Economic Society, vol. 134(657), pages 271-294.
    19. Rune Vejlin & Gregory F. Veramendi, 2023. "Sufficient statistics for frictional wage dispersion and growth," Quantitative Economics, Econometric Society, vol. 14(3), pages 935-979, July.
    20. Aspen Gorry, 2016. "Experience and worker flows," Quantitative Economics, Econometric Society, vol. 7(1), pages 225-255, March.

    More about this item

    Keywords

    risk premium; starting wages; unknown productivity; wage rigidity;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp9578. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.