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Wage Risk and Employment Risk over the Life Cycle

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Author Info
Hamish Low
Costas Meghir
Luigi Pistaferri

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Abstract

We specify a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects. The sources of risk are shocks to productivity, job destruction, the process of job arrival when employed and unemployed and match level heterogeneity. In contrast to simpler models that attribute all income fluctuations to shocks, our framework disentangles variability due to shocks from variability due to the responses to these shocks. Estimates of productivity risk, once we control for employment risk and for individual labour supply choices, are substantially lower than estimates that attribute all wage variation to productivity risk. Increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving. Increases in employment risk have large effects on output and, primarily through this channel, affect welfare. The welfare value of government p rogram s such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14901.

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Date of creation: Apr 2009
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Handle: RePEc:nbr:nberwo:14901

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gadi Barlevy & H.N. Nagaraja, 2006. "Identification of Search Models with Initial Condition Problems," NBER Working Papers 12166, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Jerome Adda & Christian Dustmann & Costas Meghir & Jean-Marc Robin, 2006. "Career progression and formal versus on-the-job training," IFS Working Papers W06/16, Institute for Fiscal Studies. [Downloadable!]
    Other versions:
  3. Peter Haan & Victoria Prowse, 2009. "A Structural Approach to Estimating the Effect of Taxation on the Labor Market Dynamics of Older Workers," SOEPpapers 185, DIW Berlin, The German Socio-Economic Panel (SOEP). [Downloadable!]
    Other versions:
  4. Santos Monteiro, Paulo, 2005. "Family labor supply, precautionary behavior, aggregate saving and employment," MPRA Paper 2113, University Library of Munich, Germany, revised Mar 2007. [Downloadable!]
  5. repec:ese:iserwp: is not listed on IDEAS
  6. Joseph G. Altonji & Anthony Smith & Ivan Vidangos, 2009. "Modeling Earnings Dynamics," NBER Working Papers 14743, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Renata Bottazzi & Hamish Low & Matthew Wakefield, 2007. "Why do home owners work longer hours?," IFS Working Papers W07/10, Institute for Fiscal Studies. [Downloadable!]
  8. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Flabbi, Luca & Leonardi, Marco, 2008. "Sources of Earnings Instability: Estimates from an On-the-Job Search Model of the U.S. Labor Market," IZA Discussion Papers 3387, Institute for the Study of Labor (IZA). [Downloadable!]
  10. Christopher D. Carroll & Miles S. Kimball, 2006. "Precautionary Saving and Precautionary Wealth," Economics Working Paper Archive 530, The Johns Hopkins University,Department of Economics. [Downloadable!]
  11. Tomoaki Yamada, 2009. "Income Risk, Consumption Inequality, and Macroeconomy in Japan," Global COE Hi-Stat Discussion Paper Series gd08-041, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  12. Thomas Crossley & Hamish Low, 2004. "When Might Unemployment Insurance Matter?," Department of Economics Working Papers 2004-04, McMaster University. [Downloadable!]
  13. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2007. "Consumption and Labour Supply with Partial Insurance: An Analytical Framework," CEPR Discussion Papers 6280, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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