Why less secure jobs pay less

In financial markets, risk is generally rewarded with higher returns. On labor markets, this is much less obvious. While some public jobs like police officers, jail guards and firefighters are rewarded with early retirement packages, the private labor markets is ironically much less willing to reward risk. Just compare miners and white collars. It is even worse for those facing unemployment risk, especially within firms. How could such an equilibrium come about?

Roberto Pinheiro and Ludo Visschers can explain this with a labor search model where firms differ in job separation probabilities. In firms with short expected job tenures, the value of a job is low for both workers and firms. As workers can search for better opportunities while on the job, they are willing to accept low wages with the riskiest firms, who thus also remain competitive. But some workers also get scarred but getting stuck with such jobs. Of course, this logic is not valid for low risk firms. This leads to wage heterogeneity across firms and workers. Coincidentally, workers tends to move to safer jobs, thereby increasing the average job tenure as they age, a nice feature of the model.

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