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Career Choice and the Risk Premium in the Labor Market

Author

Listed:
  • German Cubas

    (University of Houston)

  • Pedro Silos

    (Temple University)

Abstract

We find a strong, robust, and positive correlation between average earnings and the standard deviation of both temporary and permanent idiosyncratic shocks to earnings across 19 US industries. Is this compensation for risk or for unobserved abilities? To answer this question we embed a Roy model into an incomplete markets equilibrium framework that features risk averse individuals who face industry-specific idiosyncratic shocks to their labor earnings. The interaction between earnings shocks and an individual's comparative advantage determines the optimal industry choice. (Copyright: Elsevier)

Suggested Citation

  • German Cubas & Pedro Silos, 2017. "Career Choice and the Risk Premium in the Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 1-18, October.
    • Handle: RePEc:red:issued:15-44
    DOI: 10.1016/j.red.2017.02.009
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    Cited by:

    1. German Cubas & Pedro Silos, 2020. "Social Insurance And Occupational Mobility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 219-240, February.
    2. Corina Boar, 2020. "Dynastic Precautionary Savings," NBER Working Papers 26635, National Bureau of Economic Research, Inc.
    3. Eleanor W. Dillon, 2018. "Risk and Return Trade-Offs in Lifetime Earnings," Journal of Labor Economics, University of Chicago Press, vol. 36(4), pages 981-1021.
    4. Wenbiao Cai, 2016. "Risk, Selection and Productivity Differences," Departmental Working Papers 2016-02, The University of Winnipeg, Department of Economics.
    5. Corina Boar, 2021. "Dynastic Precautionary Savings [“Deconstructing Life Cycle Expenditure”]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2735-2765.
    6. Yang, Guanyi & Casner, Ben, 2021. "How much does schooling disutility matter?," Research in Economics, Elsevier, vol. 75(1), pages 87-95.
    7. Daniel J. Henderson & Anne-Charlotte Souto & Le Wang, 2020. "Higher-Order Risk–Returns to Education," JRFM, MDPI, vol. 13(11), pages 1-25, October.
    8. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2019. "Staying the Course or Rolling the Dice: Time Horizon’s Effect on the Propensity to Take Risk," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 42(1), pages 66-85.
    9. German Cubas & Pedro Silos & Vesa Soini, 2021. "Risk and the Misallocation of Human Capital," DETU Working Papers 2103, Department of Economics, Temple University.

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    More about this item

    Keywords

    Risk premium; Labor markets; Roy model; Incomplete markets;
    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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