Gunning, J., Bigsten, A., Collier, P., Dercon, S., Fafchamps, M., Gauthier, B., Oduro, A., Oostendorp, R., Pattillo, C., Söderbom, M., Teal, F. and Zeufack, A. (2003). Risk Sharing in Labour Markets World Bank Economic Review, 17(4):349--366.

Empirical work in labour economics has focused on rent sharing as an explanation for the observed correlation in cross-sections between wages and profitability. The alternative explanation of risk sharing between workers and employers has not been tested. Using a unique panel data set for four African countries we find strong evidence of risk sharing. Workers in effect offer insurance to employers: when firms are hit by temporary shocks the effect on profits is cushioned by risk sharing with workers. Rent sharing is a symptom of an inefficient labor market. Risk sharing, however, can be seen as an efficient response to missing markets. Our evidence suggests that risk sharing accounts for a substantial part of the observed effect of shocks on wages.