Wage insurance within German firms: do institutions matter?

Summary Using a large linked employer–employee data set, the paper studies the extent to which German employers insure workers against transitory and permanent firm level shocks. Particular emphasis is given to the question of whether the amount of wage insurance depends on the nature of industrial relations. Adopting the identification strategy that was introduced by Guiso and co‐workers, it is shown that industry level contracts and local works councils are important insurance providers. These findings lend support to the notion that collective institutions may mitigate the enforcement problems that typically arise within risk sharing agreements. Moreover, the ability of industry level contracts to insulate workers' wages from shocks appears to decrease with plant size, whereas works councils' ability to provide insurance increases with plant size. This latter finding is consistent with works councils having, by law, more information rights at larger employers.