Risk Sharing in Labour Markets

J.W. Gunning, A. Bigsten, P. Collier, S. Dercon, M. Fafchamps, B. Gauthier, A. Oduro, R.H. Oostendorp, C. Pattillo, M Söderbom, F. Teal, A. Zeufack

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Abstract

Empirical work in labour economics has focused on rent sharing as an explanation for the observed correlation in cross-sections between wages and profitability. The alternative explanation of risk sharing between workers and employers has not been tested. Using a unique panel data set for four African countries we find strong evidence of risk sharing. Workers in effect offer insurance to employers: when firms are hit by temporary shocks the effect on profits is cushioned by risk sharing with workers. Rent sharing is a symptom of an inefficient labor market. Risk sharing, however, can be seen as an efficient response to missing markets. Our evidence suggests that risk sharing accounts for a substantial part of the observed effect of shocks on wages.
Original languageEnglish
Pages (from-to)349-366
Number of pages17
JournalWorld Bank Economic Review
Volume17
Issue number4
Early online date1 Dec 2003
DOIs
Publication statusPublished - Dec 2003

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