Unemployment Risk and Wage Differentials

54 Pages Posted: 14 Jan 2014

See all articles by Roberto Pinheiro

Roberto Pinheiro

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Ludo Visschers

Universidad Carlos III de Madrid - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2013

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: it depends on the behavior of all firms in the labor market and increases with the rent the employing firm leaves to the worker. We solve for the labor market equilibrium, finding that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Meanwhile, 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.

Keywords: layoff rates, unemployment risk, wage differentials, unemployment scarring

JEL Classification: J310, J630

Suggested Citation

Pinheiro, Roberto and Visschers, Ludo, Unemployment Risk and Wage Differentials (December 30, 2013). CESifo Working Paper Series No. 4534, Available at SSRN: https://ssrn.com/abstract=2378283

Roberto Pinheiro

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Ludo Visschers (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

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