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The Price of Security: On the Causality and Impact of Lay-off Risks on Wages

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  • Stefan Arent
  • Wolfgang Nagl

Abstract

We examine the impact of lay-off risks on wages. Portfolio as well as search theoretic modelling predicts higher exogenous lay-off risks to go along with higher wages. But, an impact of wages on lay-off risks (e.g., endogenous job destruction) is also plausible. Using the German BA Employment Panel (2008), we estimate a wage equation with exogenous lay-off risks for the most important industries in West Germany. We address the mutual causality by controlling for endogeneity via an instrumental variable approach. Furthermore, we restrict our analysis to the high skilled to avoid a high impact on tariff commitment. Our findings suggest the presence of risk premiums in three of five industries. The level of impact and its significance depends on the industry and on the gender of the employee.

Suggested Citation

  • Stefan Arent & Wolfgang Nagl, 2011. "The Price of Security: On the Causality and Impact of Lay-off Risks on Wages," ifo Working Paper Series 100, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:ifowps:_100
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    File URL: http://www.cesifo-group.de/DocDL/IfoWorkingPaper-100.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Lay-off risk; wages;

    JEL classification:

    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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