Unemployment Risk and Compensating Differential in Late-Nineteenth Century New Jersey Manufacturing

Abstract

In this paper we test for the existence of compensating differentials for unemployment risk in an era before unemployment insurance. Using information gathered from manufacturing worker surveys conducted during the 1880s in New Jersey, we find that workers who faced higher probabilities of predictable unemployment spells received a small compensating differential. Low-skill laborers and operatives were partially compensated for unemployment risks; skilled craftsmen were not. Although workers were not fully compensated for the unemployment risks they accepted, the results are of interest because most previous writers, dating back to Adam Smith, doubted the existence of compensating differentials in manufacturing. Differentials are typically believed to arise in employments with pronounced seasonal components, such as agriculture and construction.