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Aggregate risk and wage dispersion

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  • Scanlon, Paul

Abstract

Integrating elements of finance and labor theory, I quantify the degree to which aggregate risk affects wage premia. In the model, wages are stochastic, covary with the state of the economy, and command a risk premium. Using asset price data, I develop a lower bound for this premium, and show that it is quantitatively large for highly cyclical jobs with volatile labor compensation. By raising top incomes, this channel has played a role in amplifying income inequality.

Suggested Citation

  • Scanlon, Paul, 2020. "Aggregate risk and wage dispersion," Economics Letters, Elsevier, vol. 194(C).
    • Handle: RePEc:eee:ecolet:v:194:y:2020:i:c:s0165176520302329
    DOI: 10.1016/j.econlet.2020.109366
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    References listed on IDEAS

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    1. Florian S. Peters & Alexander F. Wagner, 2014. "The Executive Turnover Risk Premium," Journal of Finance, American Finance Association, vol. 69(4), pages 1529-1563, August.
    2. Fatih Guvenen & Sam Schulhofer-Wohl & Jae Song & Motohiro Yogo, 2017. "Worker Betas: Five Facts about Systematic Earnings Risk," American Economic Review, American Economic Association, vol. 107(5), pages 398-403, May.
    3. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    4. Thomas Philippon & Ariell Reshef, 2012. "Wages and Human Capital in the U.S. Finance Industry: 1909--2006," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1551-1609.
    5. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality in the United States, 1913–1998," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 1-41.
    6. Jonathan A. Parker & Annette Vissing-Jorgensen, 2010. "The Increase in Income Cyclicality of High-Income Households and Its Relation to the Rise in Top Income Shares," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 1-70.
    7. Robin Greenwood & David Scharfstein, 2013. "The Growth of Finance," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 3-28, Spring.
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    Cited by:

    1. Jorge Eduardo Camusso & Ana Inés Navarro, 2020. "COVID-19, recession and fall in real wages in Argentina. Who will be most affected?," Asociación Argentina de Economía Política: Working Papers 4323, Asociación Argentina de Economía Política.
    2. Jorge Eduardo Camusso & Ana Inés Navarro, 2021. "Asymmetries in aggregate income risk over the business cycle: evidence from administrative data of Argentina," Asociación Argentina de Economía Política: Working Papers 4447, Asociación Argentina de Economía Política.

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    More about this item

    Keywords

    Inequality; Compensating differentials; Income distribution; Risk premium;
    All these keywords.

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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