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Labor Income Indices Designed for Use in Contracts Promoting Income Risk Management

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  • Shiller, R.J.
  • Schneider, R.

Abstract

We propose that labor income indices be used to define settlements in many contracts, such as labor contracts, indexed bonds, or income securities. We discuss the issues in producing labor income indices for such uses, and develop prototype indices using US. data from the Panel Study of Income Dynamics (PSID). People are grouped by a clustering algorithm based on an estimated transition matrix between jobs, by education level, and by skill category. The groupings are defined so that few people move between them. For each grouping we generate a labor income index (1968–87) using a hedonic repeated‐measures regression method. The indices show substantial variability through time, confirming the potential importance of the use of such indices in contracts. There is also substantial variability across groupings, as for example between the agriculture/labor grouping and other groupings, confirming the importance of using the grouping indices rather than aggregate indices in contracts.
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Suggested Citation

  • Shiller, R.J. & Schneider, R., 1995. "Labor Income Indices Designed for Use in Contracts Promoting Income Risk Management," Papers 730, Yale - Economic Growth Center.
    • Handle: RePEc:fth:yalegr:730
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    1. Gary Solon & Robert Barsky & Jonathan A. Parker, 1994. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 1-25.
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    Cited by:

    1. Robert J. Shiller, 2006. "Designing Indexed Units of Account," Chapters, in: Lawrence R. Klein (ed.), Long-run Growth and Short-run Stabilization, chapter 11, Edward Elgar Publishing.
    2. Madeira, Carlos, 2019. "Measuring the covariance risk of consumer debt portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 21-38.
    3. Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873.
    4. Robert J. Shiller, 2014. "Speculative Asset Prices (Nobel Prize Lecture)," Cowles Foundation Discussion Papers 1936, Cowles Foundation for Research in Economics, Yale University.
    5. Rainer Schulz & Martin Wersing & Axel Werwatz, 2014. "Renting versus Owning and the Role of Human Capital: Evidence from Germany," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 754-788, May.
    6. Robert J. Shiller, 1997. "Expanding the Scope of Individual Risk Management: Moral Hazard and Other Behavioral Considerations," Cowles Foundation Discussion Papers 1145, Cowles Foundation for Research in Economics, Yale University.
    7. Robert J. Shiller, 2014. "Speculative Asset Prices," American Economic Review, American Economic Association, vol. 104(6), pages 1486-1517, June.
    8. Robert Hahn & Paul Tetlock, 2006. "A New Approach for Regulating Information Markets," Journal of Regulatory Economics, Springer, vol. 29(3), pages 265-281, May.
    9. Robert J. Shiller, 1997. "Public Resistance to Indexation: A Puzzle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 159-228.
    10. Mario Sarcinelli, 2003. "Crisi economiche e mercati finanziari: di aiuto un nuovo ordine finanziario?," Moneta e Credito, Economia civile, vol. 56(224), pages 387-422.
    11. Shiller, Robert J., 2017. "Economic risks associated with deep change in technology, and their mitigation," Journal of Policy Modeling, Elsevier, vol. 39(4), pages 616-624.

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    More about this item

    Keywords

    EMPLOYMENT; CONTRACTS; INSURANCE;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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