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Are starting wages reduced by an insurance premium for preventing wage decline? Testing the prediction of Harris and Holmstrom (1982)

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  • Hartog, Joop
  • Raposo, Pedro

Abstract

In the model of Harris and Holmstrom (1982) labour market entrants pay an insurance premium to prevent wage decline. As employers are unable to assess the ability of an entrant, they would offer a wage equal to expected productivity of the worker's category and adjust it with unfolding information on true individual productivity. Workers are willing to accept a reduction in starting wage to prevent a reduction in their wage when their productivity is revealed to be below the expected value for their category. Harris and Holmstrom assume that entrant ability risk can be measured from wage variance of experienced workers, implying a negative effect of later variance on starting wages. Using Portuguese data covering virtually all private sector employees, we find that the prediction is unequivocally rejected. Robustness, flaws and pitfalls of the test are discussed.

Suggested Citation

  • Hartog, Joop & Raposo, Pedro, 2017. "Are starting wages reduced by an insurance premium for preventing wage decline? Testing the prediction of Harris and Holmstrom (1982)," Labour Economics, Elsevier, vol. 48(C), pages 105-119.
    • Handle: RePEc:eee:labeco:v:48:y:2017:i:c:p:105-119
    DOI: 10.1016/j.labeco.2017.06.005
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    Cited by:

    1. Hartog, Joop & Raposo, Pedro & Reis, Hugo, 2018. "Vocational High School Graduate Wage Gap: The Role of Cognitive Skills and Firms," IZA Discussion Papers 11549, Institute of Labor Economics (IZA).
    2. Joop Hartog & Pedro Raposo & Hugo Reis, 2022. "Fluctuations in the wage gap between vocational and general secondary education: lessons from Portugal," Journal of Population Economics, Springer;European Society for Population Economics, vol. 35(2), pages 643-675, April.

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    More about this item

    Keywords

    Risk premium; Starting wages; Unknown productivity; Wage rigidity;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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