Temporary Layoffs, and Compensating Wage Differentials

This paper models the competitive equilibrium wage rate when employ-ment 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 pro-portional to the squared expected unemployment rate and a risk com-pensation proposal 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 unemploy-ment variance which depends on personal employment history and indus-try-wide and economy-wide factors. Compensating wage differentials ranging from less than one percent to more than fourteen percent are estimated for a two-digit industry classification over the years 1970-75. 4.