Munich Personal RePEc Archive

Unemployment risk and wage differentials

Pinheiro, Roberto B. and Visschers, Ludo (2012): Unemployment risk and wage differentials.


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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, but do so only in offered job security (the probability that the worker is not sent into unemployment). In a setting where workers search on and off the job, wages paid increase with job security for at least all ﬁrms in the risky tail of the distribution of ﬁrm-level unemployment risk. As a result, unemployment spells become persistent for low-wage and unemployed workers, a seeming pattern of ‘unemployment scarring’, that is created entirely by ﬁrm heterogeneity alone. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

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