Starting Wages Respond to Employer's Risk

32 Pages Posted: 11 Jun 2014

See all articles by Peter H. G. Berkhout

Peter H. G. Berkhout

University of Amsterdam - SEO Economic Research

Joop Hartog

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Hans van Ophem

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

Firms hiring new graduates face uncertainty on the future productivity of workers. Theory suggests that starting wages reflect this, with lower pay for greater uncertainty. We use the dispersion of exam grades within a field of education as an indicator of the unobserved heterogeneity that employers face. We find solid evidence that starting wages are lower if the variance of exam grades is higher and higher if the skew is higher: employers shift the cost of productivity risk to new hires, but pay for the opportunity to catch a really good worker. Estimating the extent of risk cost sharing between firm and worker shows that shifting to workers is larger in the market sector than in the public sector and diminishes with experience.

Suggested Citation

Berkhout, Peter H. G. and Hartog, Joop and van Ophem, Hans, Starting Wages Respond to Employer's Risk (July 2014). Scottish Journal of Political Economy, Vol. 61, Issue 3, pp. 229-260, 2014. Available at SSRN: https://ssrn.com/abstract=2448773 or http://dx.doi.org/10.1111/sjpe.12043

Peter H. G. Berkhout (Contact Author)

University of Amsterdam - SEO Economic Research ( email )

Roetersstraat 29
Amsterdam, 1018 WB
Netherlands

Joop Hartog

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Hans Van Ophem

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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