Unemployment risk and wage differentials

Abstract

Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous: it depends on the behavior of all firms in the labor market and increases with the rent the employing firm leaves to the worker. We solve for the labor market equilibrium, finding that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Meanwhile, unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

Pathways from workplace flexibility to turnover intention: Role of work–family conflict, family–work conflict, and job satisfaction

“…One of the most significant challenges faced by low-wage workers is the risk of job loss. Research has found that low-wage work is associated with higher job insecurity, turnover rates, and unemployment risks (de Araujo, 2017;Lucifora & Salverda, 2009;Pinheiro & Visschers, 2015;Stewart, 2007). Existing evidence also suggests that low-wage workers have shorter job tenures (Lane, 2000) and that engagement in low-wage employment can be a trap for many workers, making the transition from low-wage work to high-wage work difficult (Lucifora & Salverda, 2009;Mason & Salverda, 2010).…”

Job Ladders and Earnings of Displaced Workers

“…Pinheiro and Visschers (2015) have a job ladder model where the jobs at the bottom of the ladder have the highest probability of unemployment associated with them. Neither paper studies displaced worker earnings.…”

Job Stability, Earnings Dynamics, and Life-Cycle Savings

“…Jarosch (2015) also highlights the importance of heterogeneity in job stability to account for observed earnings losses. While heterogeneity in job stability arises as a bargaining outcome between employers and workers in Jung and Kuhn (2018), we follow Pinheiro and Visschers (2015) and Jarosch (2015) and introduce this heterogeneity in reduced form to the job-offer distribution. 1 Guvenen et al (2019) explore life-cycle earnings dynamics and document large heterogeneity in life-cycle nonemployment spells.…”