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

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  • Shiller, Robert J
  • Schneider, Ryan

Abstract

The authors propose that labor income indices be used to define settlements in many contracts such as labor contracts, indexed bonds, or income securities. They discuss the issues in producing labor income indices for such uses, and develop prototype indices using U.S. 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 The authors 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. Copyright 1998 by The International Association for Research in Income and Wealth.

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Article provided by International Association for Research in Income and Wealth in its journal Review of Income & Wealth.

Volume (Year): 44 (1998)
Issue (Month): 2 (June)
Pages: 163-82

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Handle: RePEc:bla:revinw:v:44:y:1998:i:2:p:163-82

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  1. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, Econometric Society, vol. 56(2), pages 259-93, March.
  2. Athanasoulis, S. & Shiller, R.J., 1995. "World Income Components: Measuring and Exploting International Risk Sharing Opportunities," Papers, Yale - Economic Growth Center 725, Yale - Economic Growth Center.
  3. Cargill, Thomas F, 1969. "An Empirical Investigation of the Wage-Lag Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 59(5), pages 806-16, December.
  4. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(2), pages 221-235, April.
  5. Shiller, Robert J, 1993. " Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Journal of Finance, American Finance Association, American Finance Association, vol. 48(3), pages 911-31, July.
  6. Gary Solon & Robert Barsky & Jonathan A. Parker, 1992. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias," NBER Working Papers 4202, National Bureau of Economic Research, Inc.
  7. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(4), pages 666-89, August.
  8. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 217-272.
  9. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 250-54, May.
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Cited by:
  1. Robert Hahn & Paul Tetlock, 2006. "A New Approach for Regulating Information Markets," Journal of Regulatory Economics, Springer, Springer, vol. 29(3), pages 265-281, 05.
  2. Robert J. Shiller, 1999. "Designing Indexed Units of Account," NBER Working Papers 7160, National Bureau of Economic Research, Inc.
  3. 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, Springer, vol. 48(4), pages 754-788, May.
  4. Robert J. Shiller, 1997. "Expanding the Scope of Individual Risk Management: Moral Hazard and Other Behavioral Considerations," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1145, Cowles Foundation for Research in Economics, Yale University.
  5. Mario Sarcinelli, 2003. "Crisi economiche e mercati finanziari:  di aiuto un nuovo ordine finanziario?," Moneta e Credito, Economia civile, Economia civile, vol. 56(224), pages 387-422.

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