Wage Insurance within German Firms: Do Institutions Matter?

Drawing on a large-scale German Linked Employer- Employee data set, this paper studies the extent to which employers insure workers against firm-level shocks. Particular emphasis is given to the question of whether trade unions and works councils facilitate risk-sharing contracts between workers and firms. Given that the extent of insurance should critically depend on the frequency of the shock, we adopt the identification strategy proposed by Guiso et al. (2005), which enables us to distinguish between transitory and permanent shocks. In addressing the role of collective bargaining coverage for the amount of wage insurance, our results offer a remarkably consistent picture. Wage insurance is found to be particularly apparent for employers who are subject to collective wage agreements. Moreover, the ability of collective contracts to provide wage insurance appears to decrease with plant size. While in small plants (plant size · 100 employees) collective contracts are sufficient on their own to fully insure workers against transitory shocks, they provide only partial insurance in medium-sized (100 < plant size · 500) and large plants (plant size > 500). At large employers, the joint existence of collective contracts and works councils helps to provide full insurance against transitory shocks, but provides only partial insurance against permanent shocks. This finding supports the view that the amount of insurance against permanent shocks should be constrained by the possibility of job losses and bankruptcy. The established differences across size classes provide some support for the notion that the degree of information asymmetries is likely to increase with firm size. This should render full insurance under collective contracts at medium-sized and large employers much more difficult and may therefore require the additional existence of a local worker representation. The fact that the latter succeeds in insuring workers only at large employers is consistent with works councils having more formal information rights in large plants.

Gürtzgen, Nicole (2009), Wage Insurance within German Firms: Do Institutions Matter?, ZEW Discussion Paper No. 09-043, Mannheim.