Are Starting Wages Reduced by an Insurance Premium for Preventing Wage Decline? Testing the Prediction of Harris and Holmstrom (1982)

34 Pages Posted: 26 Dec 2015

See all articles by Joop Hartog

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

Pedro S. Raposo

Tilburg University - Center for Economic Research (CentER)

Abstract

In the model of Harris and Holmstrom (1982) workers pay an insurance premium to prevent a wage decline. As employers are unable to assess the ability of a labour market entrant, they would offer a wage equal to expected productivity of the worker's category and adjust it with unfolding information on true individual productivity. Workers are willing to accept a reduction in starting wage to prevent a reduction in their wage when their productivity is revealed to be below the expected value for their category. While Harris and Holmstrom indicate crystal clear how the prediction can be tested, their prescription has never been applied. Using Portuguese data covering virtually the entire labour force, we find that the prediction is unequivocally rejected. We interpret the results instead as confirmation of earlier results showing that workers are compensated for the financial risk of investing in an education.

Keywords: risk premium, starting wages, unknown productivity, wage rigidity

JEL Classification: J310, D860

Suggested Citation

Hartog, Joop and Raposo, Pedro S., Are Starting Wages Reduced by an Insurance Premium for Preventing Wage Decline? Testing the Prediction of Harris and Holmstrom (1982). IZA Discussion Paper No. 9578. Available at SSRN: https://ssrn.com/abstract=2708391

Joop Hartog (Contact Author)

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

Pedro S. Raposo

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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