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Comparative Advantage and Risk Premia in Labor Markets

Author

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  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • GERMAN CUBAS

    (Central Bank of Uruguay)

Abstract

Using the Survey of Income and Program Participation (SIPP) we estimate quarterly labor earnings risk across 21 industries of the US economy. We document a significant and positive association between earnings risk (both permanent and transitory) and average log-earnings across industries. The Finance sector is 50% riskier than Government which implies a mean earnings premium of 20%. We develop an equilibrium framework to analyze the interplay between volatility in labor earnings and comparative advantage in determining the level of earnings across industries. We use the model to decompose how much of the empirical correlation represents compensation for risk and how much represents selection. The positive association between permanent risk and earnings is compensation for risk, but selection is responsible for the observed relationship between temporary risk and mean earnings.

Suggested Citation

  • Pedro Silos & GERMAN CUBAS, 2013. "Comparative Advantage and Risk Premia in Labor Markets," 2013 Meeting Papers 789, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:789
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    References listed on IDEAS

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    Cited by:

    1. Neumuller, Seth, 2015. "Inter-industry wage differentials revisited: Wage volatility and the option value of mobility," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 38-54.

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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