Which workers get insurance within the firm?

Industry-level time series data suggest that low-skilled workers get less insurance within the firm than high-skilled workers. In particular, wages respond relatively more to productivity shocks in low-skilled industries than high-skilled industries. Our theory is that low-skilled workers get relatively less insurance from their firms because they have relatively lower displacement costs. Under limited commitment, lower displacement costs make the workers' outside options more attractive, and hence decrease the amount of risk sharing sustainable within the firm. Evidence on average displacement costs by industry support the theory's predictions.

► Wages respond most to productivity shocks in low-skilled industries. ► Low-skilled workers tend to have relatively lower displacement costs. ► Limited-commitment model links displacement costs and wage responsiveness. ► Model predicts that lower displacement costs imply more responsive wages. ► Industry evidence supports the model's predictions.