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Risk and the Misallocation of Human Capital

Author

Listed:
  • German Cubas

    (Department of Economics, University of Houston)

  • Pedro Silos

    (Department of Economics, Temple University)

  • Vesa Soini

    (Department of Economics, Hanken School of Economics and Helsinki Graduate School of Economics)

Abstract

With risk-averse workers and uninsurable earnings shocks, competitive markets allocate too few workers to jobs with high earnings uncertainty. Using an equilibrium Roy model with incomplete markets we show that risky occupations are inefficiently small and hence talent is misallocated. We obtain analytical expressions for the compensation for risk in the labor market, and for the aggregate level of human capital and output. Misallocation is positively related to the correlation between a worker’s abilities in different occupations. Quantitatively we find that market incompleteness can by itself generate permanent output and welfare losses in the order of one percent of GDP.

Suggested Citation

  • German Cubas & Pedro Silos & Vesa Soini, 2021. "Risk and the Misallocation of Human Capital," DETU Working Papers 2103, Department of Economics, Temple University.
    • Handle: RePEc:tem:wpaper:2103
    as

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    File URL: http://www.cla.temple.edu/RePEc/documents/DETU_21_03.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Misallocation; Human Capital; Occupations; Risk; Incomplete Markets; Frèchet; Roy Model.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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

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