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 language | English |
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Pages (from-to) | 349-366 |
Number of pages | 17 |
Journal | World Bank Economic Review |
Volume | 17 |
Issue number | 4 |
Early online date | 1 Dec 2003 |
DOIs | |
Publication status | Published - Dec 2003 |