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Hours Risk and Wage Risk: Repercussions over the Life-Cycle

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  • Robin Jessen
  • Johannes König

Abstract

We decompose permanent earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks we formulate a life-cycle model of consumption and labor supply. Both permanent wage and hours shocks are important to explain earnings risk, but wage shocks have greater relevance. Progressive taxation strongly attenuates cross-sectional earnings risk, its life-cycle insurance impact is much smaller. At the mean, a positive hours shock of one standard deviation raises life-time income by 10%, while a similar wage shock raises it by 12%.

Suggested Citation

  • Robin Jessen & Johannes König, 2020. "Hours Risk and Wage Risk: Repercussions over the Life-Cycle," Discussion Papers of DIW Berlin 1845, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1845
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    References listed on IDEAS

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    More about this item

    Keywords

    Earnings Risk; Wage Risk; Labor Supply; Progressive Taxation; Consumption Insurance;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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