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Starting Wages Respond to Employer’s Risk

Listed author(s):
  • Berkhout, Peter


    (RIGO Research Institute)

  • Hartog, Joop


    (University of Amsterdam)

Firms hiring fresh graduates face uncertainty on the future productivity of workers. Intuitively, one expects starting wages to reflect this. Formal analysis supports the intuition. We use the dispersion of exam grades within a field of education as an indicator of the heterogeneity that employers face. We find solid evidence that starting wages are lower if the variance of exam grades is higher and that starting wages are lower if the skew is higher: employers shift quality risk to new hires, but pay for the opportunity to catch the really good workers.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3026.

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Length: 29 pages
Date of creation: Sep 2007
Publication status: published in Scottish Journal of Political Economy, 61 (3), 229-260
Handle: RePEc:iza:izadps:dp3026
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