Increasing idiosyncratic risk and converging gender differentials in the labor market

The gender differentials in schooling and labor market outcomes have narrowed significantly in the last few decades. At the same time, it is well documented that idiosyncratic income risk has risen over the same period. We define idiosyncratic risk as the variance of the unobserved wage component in the labor market. We estimate the structural parameters of the model using the US data on schooling, employment and earnings in the 1970s. With a mean-preserving increase in the wage variance, men, who used to work 80 to 90 percent of the time, are now more likely to stay home due to more frequent realizations of big negative wage shocks, and hence their motive for human capital accumulation through schooling and working weakens. In contrast, women, who used to work much less than men, now work more due to more frequent realizations of big positive wage shocks, and their motive for human capital accumulation through schooling and working intensifies. We quantify such effects and conclude that the increase in idiosyncratic income risk can account for much of the observed converging pattern of gender differentials in schooling and labor market outcomes over the last 30 years.