We present evidence that low-skill workers received larger compensating differentials than more skilled workers when facing unanticipated unemployment in an era without unemployment insurance. Using information from surveys of New Jersey workers conducted during the 1880s, we test the theory of compensating wage differentials. We find that workers who faced a higher probability of predictable unemployment received compensating differentials and that the size of the differential differed across industries and skill levels. With few firm- or industry-specific skills, unskilled workers were less subject to quot;informational capturequot; than skilled workers who had more but less easily transferable human capital.

In labor market equilibrium, sectoral differences in natural rates of unemployment generate a conformable distribution of wage differentials that compensate workers for bearing unemployment risk. This paper offers new empirical evidence on the determinants of the equilibrium. The analysis consists of two stages. First, I estimate a three-state model of employment and unemployment that identifies the determinants of individuals' rates of entering and leaving employment spells. Sectoral and policy-induced differences in unemployment probabilities evolve naturally from this framework. Second, I estimate the impact of these differences on the distribution of wages. An important finding is the powerful impact of the unemployment insurance (UI) system both on unemployment and on equalizing wage differences. The evidence is strong that the availability of UI increases unemployment, while simultaneously reducing the magnitude of compenstaing wage differentials. Neglect of the role of UI as a substitute for wages partially accounts for the small compensating differentials estimated in previous research.

This paper develops a model to explain the wage differential (salary discount) between a person granted with a job without risk of unemployment (lifetime employment; tenure) and another without such guarantee ceteris paribus. The discount and its sensitivity to different key parameters of the model are analyzed. The results show the minimum acceptable discount to be approximately two to five per cents under reasonable assumptions. The model can be easily applied to study two jobs both of which are subject to (unequal) unemployment risk as well as a number of other issues related to the salaries including setting an appropriate salary for employees on a tenure track, comparing differences in the salaries of different tenured or untenured professions, or calculating the reservation salary for tenured employees.

(Cont.) The government's capacity to insure workers is limited by the market wage setting, which gives workers a share in the employment surplus. When the government provides higher unemployment benefits, the bargained wages increase, and unemployment rises. These equilibrium responses have a negative effect on workers' welfare if workers' bargaining power is above a certain point, which is lower than the matching elasticity. As risk aversion increases, workers' share in the wage bargain is smaller, and thus the equilibrium effects are attenuated. The constrained optimal provision of unemployment benefits is a modification of the Hosios condition for efficient unemployment insurance and highlights the roles of bargaining and risk aversion. The optimal level of insurance increases with risk aversion, with the costs of creating a vacancy and with workers' higher bargaining power.

Wages are a vital economic variable in their influence on employment and unemployment and as the main source of personal income, affecting both living standards and labour incentives. Wage determination is studied here in an international perspective, using a common theoretical framework and statistical method through the individual country chapters to reveal similarities and differences between Japan, South Korea, the United States, Canada, Australia, the United Kingdom, Germany and France.

The papers in this volume present an excellent sampling of the best of current research in labor economics, combining the most sophisticated theory and econometric methods with high-quality data on a variety of problems. Originally presented at a Universities-National Bureau Committee for Economic Research conference on labor markets in 1978, and not published elsewhere, the thirteen papers treat four interrelated themes: labor mobility, job turnover, and life-cycle dynamics; the analysis of unemployment compensation and employment policy; labor market discrimination; and labor market information and investment. The Introduction by Sherwin Rosen provides a thoughtful guide to the contents of the papers and offers suggestions for continuing research.