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Anticipated Unemployment, Temporary Layoffs and Compensating Wage Differentials

Author

Listed:
  • John M. Abowd

    (University of Chicago)

  • Orley Ashenfelter

    (Princeton University)

Abstract

This paper models the competitive equilibrium wage rate when employment offers vary according to the amount of anticipated unemployment and unemployment risk. The competitive wage reflects a compensating differential which includes a certainty equivalent compensation proportional to the squared expected unemployment rate and a risk compensation proportional to the coefficient of unemployment variation. The factors of proportionality are half the inverse compensated labor supply elasticity and half the relative risk aversion, respectively. we use panel data to construct a model of anticipated unemployment and unemployment variance which depends on personal employment history, industry and economy-wide factors. Compensating wage differentials ranging from less than 1% to more than l4% are estimated for a two-digit industry classification over the years 1970 to 1975.

Suggested Citation

  • John M. Abowd & Orley Ashenfelter, 1980. "Anticipated Unemployment, Temporary Layoffs and Compensating Wage Differentials," Working Papers 517, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:137
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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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