WAGE UNCERTAINTY AND COMPETITIVE-EQUILIBRIUM IN LABOR-MARKETS

This paper analyzes the effect of wage-rate uncertainty on long-run co mpetitive equilibrium for a labour market made up of heterogeneous wor kers. We show that if workers are risk-averse an increase in wage rate uncertainty always lowers aggregate hours of work and increases the e xpected wage. We also characterize precisely the class of distribution changes that decrease (or increase) aggregate hours of work, and use this result to construct a Pareto improving negative income tax scheme . Finally, we demonstrate that an increase in risk aversion has the sa me qualitative effect on aggregate hours of work and expected wage as an increase in wage risk.