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Anticipated Unemployment, Temporary Layoffs and Compensating Wage Differentials

Listed author(s):
  • John M. Abowd

    (University of Chicago)

  • Orley Ashenfelter

    (Princeton University)

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.

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File URL: http://dataspace.princeton.edu/jspui/handle/88435/dsp01fx719m450
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Paper provided by Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 517.

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Date of creation: Jun 1980
Handle: RePEc:pri:indrel:137
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  1. Keeley, Michael C, et al, 1978. "The Estimation of Labor Supply Models Using Experimental Data," American Economic Review, American Economic Association, vol. 68(5), pages 873-887, December.
  2. Ashenfelter, Orley & Heckman, James J, 1974. "The Estimation of Income and Substitution Effects in a Model of Family Labor Supply," Econometrica, Econometric Society, vol. 42(1), pages 73-85, January.
  3. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  4. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  5. Zellner, Arnold, 1978. "Estimation of functions of population means and regression coefficients including structural coefficients : A minimum expected loss (MELO) approach," Journal of Econometrics, Elsevier, vol. 8(2), pages 127-158, October.
  6. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
  7. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
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