People in Britain tend to greatly over-estimate the chances of losing their jobs,
according to new research by Professor Alan Carruth and colleagues. Their study,
which is published in the March 2007 issue of the Economic Journal, finds that such job
insecurity leads to more moderate wage claims and lower wage growth. While this is
generally beneficial for the economy as a whole, it is not so good for the individuals
concerned.
Can employees reliably predict the likelihood that they will lose their jobs and become
unemployed? If so, do they moderate their wage claims in the hope that their jobs will
be saved? These are the two key questions addressed by this research.
The results are important for our understanding of the operation of the labour market,
both for individuals and for the wider economy. For example, it has been suggested that
high job insecurity in the mid-1990s may have resulted in lower wage growth and thus
lower levels of unemployment in both the United States and Britain.
The first question – how well can employees predict if they are going to become
unemployed? – can be answered by examining their expectations of becoming
unemployed in the next 12 months, and then following them over time to see whether
these expectations are realised. This study reveals that:
• People are far too pessimistic in their fear of becoming unemployed – they tend
to greatly over-estimate the chances of losing their jobs.
• Nevertheless, people’s fear of unemployment is positively related to a range of
factors – such as past personal experiences of unemployment; the
unemployment experiences of a close friend; and characteristics of the current
job that are typically associated with ‘fragile’ employment and thus make it more
likely they will lose their job.
• The probability of someone becoming unemployed in the next 12-month period
is significantly greater for employees who report higher levels of job insecurity.
Even taking account of other factors and characteristics that increase the chances of
unemployment, individuals’ fear of job loss is still an important predictor of whether they
subsequently will actually lose their jobs.
In this sense, employees seem to have ‘private information’ about their job security.
Misperception of risk is a known social phenomenon, for example in psychology
research, so it is interesting that it also features in assessments of unemployment risk.
The second question – do people accept lower wages to try to keep their jobs? – can
be addressed by examining the wage increases for employees who do remain in
employment. Here the study finds that:
• For men who think they will lose their job, wage increases over the next year are
significantly lower than for men who are confident that they will keep their job.
Employees who are most fearful of job loss receive wage increases that are 12
percentage points lower on average than of those of employees who have no
fear of unemployment.
• In contrast, for women, there is no evidence that their fear of unemployment is
associated with lower wage growth.
The findings of this paper have two important implications. First, individuals’ subjective
expectations should be regarded as reliable and valid indicators, which can provide
useful additional information for researchers. Economists are often sceptical of
subjective data, but these results are positive on their usefulness.
In this particular case, it is clear that, in effect, people have ‘insider knowledge’ about
the likelihood of losing their jobs and this information is not available in the objective
data collected by government agencies. These subjective expectations of job loss could
be used to provide a useful leading indicator of future unemployment patterns.
Second, there is evidence that a high level of job insecurity can lead to more moderate
wage clams and consequently lower wage growth. For the individuals affected in this
way, job insecurity results in poorer job outcomes, even if the outcome for the economy
as a whole may be rather more beneficial.
ENDS
Notes for editors: ‘Job Insecurity and Wages‘ by David Campbell, Alan Carruth, Andy
Dickerson and Francis Green is published in the March 2007 issue of the Economic
Journal.
The findings are derived from an analysis of data from the British Household Panel
Survey, a representative survey of around 5,000 households and 10,000 individuals in
the UK, and the 2001 Skills Survey, which surveyed around 4,500 individuals.
Campbell, Carruth and Green are all in the Department of Economics at the University
of Kent (www.kent.ac.uk/economics); Dickerson is in the Department of Economics at
the University of Sheffield (www.sheffield.ac.uk/economics).
For further information: contact Alan Carruth on 01227-827449 (email:
a.a.carruth@kent.ac.uk); or Romesh Vaitilingam on 07768-661095 (email:
romesh@compuserve.com).