Are Risky Workers More Valuable to Firms?

A worker's performance may vary over time for reasons that have nothing to do with his inherent abilities, motivation, background and education. For example, over time the nature of a firm's business may change to reduce the degree of match between the human capital of the worker and the needs of the firm's business. When firms make hiring decisions, which are costly to implement or reverse, the uncertain human capital productivity has signifi cant practical implications. Conventional wisdom is that workers whose future productivity is more risky should be paid less than those whose perceived future productivity is less risky. This paper shows that in many institutional contexts the conventional wisdom is incorrect: risky workers should be paid more rather than less because those in risky segments are that much harder to replace. But on the other hand, we find that higher wages among those whose value to firms is more uncertain is also matched by a higher degree of unemployment among these groups.