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Labor Supply and Saving under Uncertainty

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Author Info
Floden, Martin () (Dept. of Economic Statistics, Stockholm School of Economics)

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Abstract

This paper examines how variations in labor supply can be used to self-insure against wage uncertainty, and the impact of such self-insurance on precautionary saving. The analytical framework is a two-period model with saving and labor-supply decisions where preferences are consistent with balanced growth. The main findings are that (i) labor-supply flexibility raises precautionary saving when future wages are uncertain, and (ii) uncertainty about future wages raises current labor supply and reduces future labor supply.

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Publisher Info
Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 597.

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Length: 19 pages
Date of creation: 22 Apr 2005
Date of revision:
Publication status: Published in Economic Journal, 2006, pages 721-737.
Handle: RePEc:hhs:hastef:0597

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Related research
Keywords: precautionary saving; prudence; labor supply;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Simon C. Parker & Yacine Belghitar & Tim Barmby, 2005. "Wage Uncertainty and the Labour Supply of Self-Employed Workers," Economic Journal, Royal Economic Society, vol. 115(502), pages C190-C207, 03. [Downloadable!] (restricted)
    Other versions:
  2. Hartwick, John M., 2000. "Labor supply under wage uncertainty," Economics Letters, Elsevier, vol. 68(3), pages 319-325, September. [Downloadable!] (restricted)
  3. Neng Wang, 2003. "Caballero Meets Bewley: The Permanent-Income Hypothesis in General Equilibrium," American Economic Review, American Economic Association, vol. 93(3), pages 927-936, June. [Downloadable!]
  4. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
  5. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Blackwell Publishing, vol. 37(3), pages 353-60, July. [Downloadable!] (restricted)
  6. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 373-396, October. [Downloadable!] (restricted)
  7. Albert Marcet & Francesc Obiols-Homs & Philippe Weil, 2002. "Incomplete Markets, Labor Supply and Capital Accumulation," Economics Working Papers 659, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2003. [Downloadable!]
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  8. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449. [Downloadable!] (restricted)
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  9. Kimball, Miles S & Weil, Philippe, 2003. "Precautionary Saving and Consumption Smoothing Across Time and Possibilities," CEPR Discussion Papers 4005, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  11. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December. [Downloadable!] (restricted)
  12. Samuelson, Paul A, 1972. "Maximum Principles in Analytical Economics," American Economic Review, American Economic Association, vol. 62(3), pages 249-62, June. [Downloadable!] (restricted)
  13. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
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  14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
  15. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April. [Downloadable!] (restricted)
    Other versions:
  2. Marika Karanassou & Hector Sala & Dennis J. Snower, 2006. "The Macroeconomics of the Labor Market: Three Fundamental Views," IZA Discussion Papers 2480, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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