What Falls During a Recession - The Three Margins of Employment Insurance
Abstract
Firms possess control over key determinants of workers’ earnings: wages, hours worked, and employment stability. As workers would rather all three remain stable over the business cycle, firms face a choice as to how to insure their workers. Empirically, firms at the bottom of the wage ladder are found to insure workers through wages, while the top - through stable hours and employment. We suggest a higher level of labor replaceability at the bottom of the ladder as the driving cause of this heterogeneity and argue for it using a dynamic contracting framework with imperfect information and limited liability embedded into a directed search model
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