Insurance within the firm

We evaluate the allocation of risk between firms and their workers
using matched employer-employee panel data. Unlike previous contributions,
this paper focuses on idiosyncratic shocks to the firm, which
are the correct empirical counterpart of the theoretical notion of
diversifiable risk. We allow for both temporary and permanent shocks
to output and find that firms absorb temporary fluctuations fully but
insure workers against permanent shocks only partially. Risk-sharing
considerations can account for about 15 percent of overall earnings
variability, the remainder originating from idiosyncratic shocks to individual workers. Our welfare calculations indicate that firms are an
important vehicle of insurance provision.