Are Risky Workers More Valuable to Firms?

12 Pages Posted: 20 Mar 2006

See all articles by J. Michael Orszag

J. Michael Orszag

Willis Towers Watson - Reigate (Surrey Office); Institute for the Study of Labor (IZA)

Gylfi Zoega

University of Iceland; University of London - Birkbeck College; Centre for Economic Policy Research (CEPR)

Date Written: March 2006

Abstract

A worker's performance may vary over time for reasons that have nothing to do with his inherent abilities, motivation, background and education. For example, over time the nature of a firm's business may change to reduce the degree of match between the human capital of the worker and the needs of the firm's business. When firms make hiring decisions, which are costly to implement or reverse, the uncertain human capital productivity has signifi cant practical implications. Conventional wisdom is that workers whose future productivity is more risky should be paid less than those whose perceived future productivity is less risky. This paper shows that in many institutional contexts the conventional wisdom is incorrect: risky workers should be paid more rather than less because those in risky segments are that much harder to replace. But on the other hand, we find that higher wages among those whose value to firms is more uncertain is also matched by a higher degree of unemployment among these groups.

Keywords: Uncertainty, wage setting, hiring, employment

JEL Classification: J23, J24

Suggested Citation

Orszag, J. Michael and Zoega, Gylfi, Are Risky Workers More Valuable to Firms? (March 2006). Watson Wyatt Technical Paper No. 2006-1, Available at SSRN: https://ssrn.com/abstract=892300 or http://dx.doi.org/10.2139/ssrn.892300

J. Michael Orszag (Contact Author)

Willis Towers Watson - Reigate (Surrey Office) ( email )

Watson House
London Road
Reigate, Surrey, RH2 9PQ
United Kingdom
+44 1737 241144 (Phone)
+44 1737 241496 (Fax)

Institute for the Study of Labor (IZA)

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

Gylfi Zoega

University of Iceland ( email )

IS-101 Reykjavik
Iceland

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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