The Price of Security: On the Causality and Impact of Lay-off Risks on Wages

What is the price of Job security and how can it be measured? Economic Theory show that higher risks of separation should go along with higher wages. The empirical evidence in the literature is mixed. We like to contribute to this literature by investig ating risk premiums in Germany for several industries using panel data. Our data basis is the German BA-employment panel. This is a 2% quarterly sample out of all socially insured employees in Germany from 1998 to 2007. To identify the impact of lay-off risks on wages we employ modern econometric methods. Thereby we discuss the problem of economic causality and econometric endogeneity in detail. In the existing literature these problems are often neglected. We fill this gap by isolating and quantifying the pure effect of lay-off risks on wages with panel econometric methods for different industries. Focusing on West Germany first empirical results suggest a positive impact of lay-off risks on wages. The effect differs with the skill level and is diffe rent for men and women. We exclude East Germany because it is still in a structural transition. Our first research findings imply that more unsecure labor market conditions are internalized in the wages.