Compensating Wage Differentials and the Duration of Wage Loss

Abstract

Several reasons are offered why workers will receive larger compensating wage differentials for increases in the duration of wage losses than for increases in the probability of loss that produce the same expected loss. A formal model of occupational choice is developed that shows the extent to which the compensation for increased duration exceeds that for increased risk. Using Panel Study of Income Dynamics data linked to industry data on injuries and unemployment, we find: 1) Nearly all the compensating wage differential for losses due to workplace injuries is compensation for increases in the duration of loss; 2) Similarly, nearly all the compensation for losses due to cyclical unemployment is compensation for increases in duration, especially for increases in duration beyond the 26 weeks of unemployment that are usually compensated by unemployment insurance. The compensating differentials for risk of injury are larger for union than for nonunion workers, while those for cyclical unemployment are smaller for union workers.

The Employers' cost of Workers' Compensation Insurance: Magnitudes, Determinants, and Public Policy

“…Perhaps most important, higher benefits in a state could be offset by lower wages, and therefore employers in high benefit states would not be at a competitive disadvantage. However, while there is evidence of a trade-off betweenbenefits and wages, the results are not compelling that benefit increases are fully offset by lower wages (see Ruser, 1985, Viscusi and Moore, 1987, and Hamermesh and Wolfe, 1989 .…”

Worker Investments in Safety, Workplace Accidents, and Compensating Wage Differentials

“…Other reasons for why VSL and VSI estimates differ so widely across studies include the role of unobservables and sorting into occupations (Hamermesh and Wolfe, ; Black and Kniesner, ; Lalive, ; Leeth and Ruser, ; Ashenfelter, ; Kniesner et al., ; Kochi and Taylor, ; Bommier and Villeneuve, ; DeLeire et al., ; Lavetti and Schmutte, ; Lavetti, ). For example, Shogren and Stamland () argue that VSL estimates would be likely upward biased if they did not account for worker heterogeneity in both risk preferences and skill at reducing risk.…”

Human Capital Loss in Corporate Bankruptcy

“…Brown and Matsa (2012) find that job seekers accurately perceive firms' financial health, suggesting that firm employees likely perceive the effect of financial health on their job security as well (or even more accurately). The evidence that compensating wage differentials respond to unemployment risk further supports this argument (Abowd and Ashenfelter, 1981;Topel, 1984;Li, 1986;Hamermesh and Wolfe, 1990;Chemmanur et al, 2012). 10 Of course, using compensating wage differentials may not be the only approach to translate the ex-post wage loss for employees into ex-ante cost of debt for the firm.…”