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Starting Wages Respond to Employer's Risk
Author(s) -
Berkhout Peter,
Hartog Joop,
Ophem Hans
Publication year - 2014
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12043
Subject(s) - productivity , economics , labour economics , variance (accounting) , public sector , dispersion (optics) , skew , physics , economy , optics , macroeconomics , astronomy , accounting
Firms hiring new graduates face uncertainty on the future productivity of workers. Theory suggests that starting wages reflect this, with lower pay for greater uncertainty. We use the dispersion of exam grades within a field of education as an indicator of the unobserved heterogeneity that employers face. We find solid evidence that starting wages are lower if the variance of exam grades is higher and higher if the skew is higher: employers shift the cost of productivity risk to new hires, but pay for the opportunity to catch a really good worker. Estimating the extent of risk cost sharing between firm and worker shows that shifting to workers is larger in the market sector than in the public sector and diminishes with experience.