Safety in Unemployment and Risky Experimentation of Young Firms

Abstract

We develop a theory in which a lower cost of unemployment increases workers’ willingness to join risky young firms, lowering negotiated wages relative to safer firms. These lower wages encourage young firms to undertake high-upside experimentation, raising aggregate productivity. Using Danish matched employer–employee data and regional labor-market variation, we show that higher job-finding rates are associated with lower wage differentials between experimenting and non-experimenting young firms, both across firms and within firms hiring across multiple areas. A randomized survey experiment supports the worker-side mechanism: worsening unemployment prospects increases the wage premium workers require to accept employment at higher-failure-risk young firms.

Keywords

JEL codes