Wage formation and recurrent unemployment

Abstract

Cross-section data on noncontractual construction workers in Egypt reveal strong attachment to the sector despite demand instability. Also present are statistically significant wage differentials between construction trades. We hypothesize that employers are compensating their noncontractual workforce for recurrent unemployment so that they can guarantee a steady supply of qualified workers. We rely on a structural model and investigate the consequences of rationing, turnover, and unanticipated risk associated with randomness in employment and unemployment durations, Estimates reveal that employers provide substantial compensation for turnover risk. Single spell data prove to be insufficient for teasing out the separate influence of unanticipated risk.