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Wage Uncertainty and Competitive Equilibrium in Labour Markets


  • Ormiston, Michael B
  • Schlee, Edward E


This paper analyzes the effect of wage-rate uncertainty on long-run competitive equilibrium for a labor market made up of heterogeneous workers. The authors show that, if workers are risk-averse, an increase in wage rate uncertainty always lowers aggregate hours of work and increases the expected wage. They also characterize precisely the class of distribution changes that decrease (or increase) aggregate hours of work and use this result to construct a Pareto-improving negative income tax scheme. Finally, the authors demonstrate that an increase in risk aversion has the same qualitative effect on aggregate hours of work and the expected wage as an increase in wage risk. Copyright 1994 by The London School of Economics and Political Science.

Suggested Citation

  • Ormiston, Michael B & Schlee, Edward E, 1994. "Wage Uncertainty and Competitive Equilibrium in Labour Markets," Economica, London School of Economics and Political Science, vol. 61(242), pages 137-145, May.
  • Handle: RePEc:bla:econom:v:61:y:1994:i:242:p:137-45

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    Cited by:

    1. Diana Weinhold & Paul J. Zak, 2005. "The Choice of Institutions: The Role of Risk and Risk-Aversion," Others 0508004, EconWPA.
    2. Lyubov A. Kurkalova & Helen H. Jensen, 2000. "Relative Growth of Subsidiary Farming in Post-Soviet Economies: A Labor Supply Story," Center for Agricultural and Rural Development (CARD) Publications 00-wp249, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    3. Hennessy, David A., 1998. "Industry equilibrium under price distribution and cost shifts," Journal of Economics and Business, Elsevier, vol. 50(6), pages 509-523, November.
    4. Sartzetakis, Eftichios S. & Tsigaris, Panagiotis D., 2009. "Uncertainty and the double dividend hypothesis," Environment and Development Economics, Cambridge University Press, vol. 14(05), pages 565-585, October.
    5. Hennessy, David A., 1997. "Equilibrium in production and futures markets," Journal of Economics and Business, Elsevier, vol. 49(5), pages 399-418.

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