John Abowd
This paper models the competitive equilibrium wage rate when
employment offers vary according to the amount of anticipated unemployment and
unemployment risk. The competitive wage reflects a compensating differential
which includes a certainty equivalent compensation proportional to the squared
expected unemployment rate and a risk compensation proportional to the
coefficient of unemployment variation. The factors of proportionality are
half the inverse compensated labor supply elasticity and half the relative
risk aversion, respectively. we use panel data to construct a model of
anticipated unemployment and unemployment variance which depends on personal
employment history, industry and economy-wide factors. Compensating wage
differentials ranging from less than 1% to more than l4% are estimated for a
two-digit industry classification over the years 1970 to 1975.
The enterprise (firm) is modeled as a collection of formal and
informal contracts providing various factors of production with claims
on the income stream in consideration of assets or services supplied to
the enterprise. The strongly efficient bargaining model implies that
the division of the quasi-rents will result in dollar for dollar
exchanges of wealth between the union members and the shareholders. The
leading inefficient bargaining models do not imply such tradeoffs in
general. The model is tested by considering contract settlements during
the years 1976 to 1982 as recorded by the Bureau of National Affairs in
Collective Bargaining Negotiations and Contracts. Security price data
for the firms were merged with these bargaining unit level settlement
data. The tests provide substantial confirmation of the dollar for
dollar wealth tradeoff between union members and shareholders.