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Unemployment Risk and Wage Differentials

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Abstract

Workers in less-secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous, increasing with the rent received by a worker in his job, and depending on the behavior of all firms in the labor market. We solve for the labor market equilibrium and find that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

Suggested Citation

  • Robert Pinheiro & Ludo Visschers, 2014. "Unemployment Risk and Wage Differentials," Edinburgh School of Economics Discussion Paper Series 250, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:250
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why less secure jobs pay less
      by Economic Logician in Economic Logic on 2012-04-12 19:43:00

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    3. Pinheiro, Roberto & Visschers, Ludo, 2015. "Unemployment risk and wage differentials," Journal of Economic Theory, Elsevier, vol. 157(C), pages 397-424.
    4. Alexander Ahammer & Dominik Grübl & Rudolf Winter-Ebmer, 2020. "The health externalities of downsizing," CDL Aging, Health, Labor working papers 2020-05, The Christian Doppler (CD) Laboratory Aging, Health, and the Labor Market, Johannes Kepler University Linz, Austria.
    5. Jean Flemming, 2018. "Costly Commuting and the Job Ladder," 2018 Meeting Papers 100, Society for Economic Dynamics.
    6. Pawel Krolikowski, 2017. "Job Ladders and Earnings of Displaced Workers," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 1-31, April.
    7. Carrillo-Tudela, Carlos & Kaas, Leo, 2015. "Worker mobility in a search model with adverse selection," Journal of Economic Theory, Elsevier, vol. 160(C), pages 340-386.
    8. Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, 2019. "Debt Constraints and Employment," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1926-1991.
    9. Kerndler, Martin, 2023. "Occupational safety in a frictional labor market," Labour Economics, Elsevier, vol. 83(C).
    10. Papageorgiou, Theodore, 2018. "Large firms and within firm occupational reallocation," Journal of Economic Theory, Elsevier, vol. 174(C), pages 184-223.
    11. Gottfries, Axel & Teulings, Coen, 2023. "Returns to on-the-job search and wage dispersion," Labour Economics, Elsevier, vol. 80(C).
    12. Kenneth Burdett & Carlos Carrillo-Tudela & Melvyn Coles, 2020. "The Cost of Job Loss," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(4), pages 1757-1798.
    13. Carlos Carrillo-Tudela & Eric Smith, 2017. "Search Capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 191-211, January.
    14. Ana Luisa Pessoa de Araujo, 2017. "Wage Inequality and Job Stability," Opportunity and Inclusive Growth Institute Working Papers 5, Federal Reserve Bank of Minneapolis.
    15. Ana Luisa Pessoa Araujo, 2018. "Wage Inequality and Job Stability," 2018 Meeting Papers 117, Society for Economic Dynamics.
    16. Gregor Jarosch, 2014. "Falling off the Ladder - Earnings Losses from Job Loss," 2014 Meeting Papers 1248, Society for Economic Dynamics.
    17. Kuhn, Moritz & Ploj, Gasper, 2020. "Job stability, earnings dynamics, and life-cycle savings," CEPR Discussion Papers 15460, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    layoff rates; unemployment risk; wage differentials; unemployment scarring;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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