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.

Labor unemployment risk and corporate financing decisions

“…Firms must compensate workers ex ante to bear these risks because they cannot fully commit to insuring workers against these costs (Abowd and Ashenfelter, 1981;Topel, 1984;Li, 1986;Rosen, 1986;and Hamermesh and Wolfe, 1990). The risksand, thus, the size of the compensation-increase with the probability of unemployment, the degree of worker risk aversion, the duration of job loss, and the costs incurred by workers during unemployment spells.…”

“…Displaced workers also suffer psychological and social costs (Kalil and Ziol-Guest, 2008;and Kalil and DeLeire, 2010). Workers' concerns about becoming unemployed reduce their labor supply (Brown and Matsa, 2012) and affect firms' policies on layoffs and wage setting, even when they are far from bankruptcy (Topel, 1983(Topel, , 1984Li, 1986;and Hamermesh, and Wolfe 1990). Despite their magnitude, however, workers' costs of unemployment are largely absent from theories in corporate finance, which typically do not emphasize labor market frictions.…”

Do Wages Compensate for Anticipated Working Time Restrictions? Evidence from Seasonal Employment in Austria

“…Previous attempts to quantify the effect of anticipated working time restrictions on wages rely on a worker's industry affiliation or his self-reported contract (Moretti, 2000;Murphy and Topel, 1987), and are often based on cross-sectional data (Assaad and Tunali, 2002;Hamermesh and Wolfe, 1990;Li, 1986;Topel, 1984). This makes it difficult to distinguish industry and individual effects from the true effect of the working time constraints.…”

“…Several studies have examined the compensating wage differentials arising from the risk of workrelated accidents (Garen, 1988;Lalive, 2003;Thaler and Rosen, 1975;Viscusi, 1979) and the risk of unemployment (Abowd and Ashenfelter, 1981;Assaad and Tunali, 2002;Hamermesh and Wolfe, 1990;Li, 1986;Topel, 1984). That body of research stresses the importance of expected or anticipated wage losses, whether these arise from job-related hazards or working hours restrictions.…”

“…Very often a clear difference can only be established by crude proxies, such as industry affiliation or self-reported definitions related to the type of contract (Moretti, 2000;Murphy and Topel, 1987). Moreover, data are often only available on a cross sectional level and this makes it difficult to control for unobserved person-specific elements, like the taste for more leisure (Assaad and Tunali, 2002;Hamermesh and Wolfe, 1990;Li, 1986;Topel, 1984).…”