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Compensating Wage Differentials for Schooling Risk in Denmark

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Author Info

  • Diaz-Serrano, Luis

    () (Universitat Rovira i Virgili)

  • Hartog, Joop

    () (University of Amsterdam)

  • Nielsen, Helena Skyt

    () (Aarhus University)

Abstract

In this paper we test for risk compensation in wages using Danish panel data. With the conviction that the type of education is as important as the education length, we use a very detailed description of the type of education reached by the Danish population to calculate different measures of earnings risk by education. Our long panel data set also allows us to decompose shocks in earnings in a permanent and a transitory component. We test the role of the risks associated to both components in wage compensation. We also experiment with new measures of earnings risk based on transitory intertemporal fluctuations in earnings. Thus, we get closer to risk measures catching the intrinsic long-run feature of schooling-risks and the required compensation. In concordance to what theory predicts, we find that the labor market compensates for such foreseeable risks. Hence, we state a return-risk trade-off for the human capital investments in Denmark.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 963.

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Length: 40 pages
Date of creation: Dec 2003
Date of revision:
Publication status: published in: Scandinavian Journal of Economics, 2008, 110(4), 711-731
Handle: RePEc:iza:izadps:dp963

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Related research

Keywords: skewness affection; risk-premium; earnings shocks; schooling risk;

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References

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  1. Belzil, Christian & Hansen, Jörgen, 2002. "Earnings Dispersion, Risk Aversion and Education," IZA Discussion Papers 513, Institute for the Study of Labor (IZA).
  2. Hartog, Joop & Vijverberg, Wim P., 2002. "Do Wages Really Compensate for Risk Aversion and Skewness Affection?," IZA Discussion Papers 426, Institute for the Study of Labor (IZA).
  3. Telhado Pereira, Pedro & Silva Martins, Pedro, 2002. "Is there a return-risk link in education?," Economics Letters, Elsevier, vol. 75(1), pages 31-37, March.
  4. Javier Alvarez & Martin Browning & Mette Ejrnæs, 2001. "Modelling Income Processes with lots of heterogeneity," CAM Working Papers 2002-01, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  5. Kodde, David A, 1986. "Uncertainty and the Demand for Education," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 460-67, August.
  6. Joop Hartog & Luis Diaz-Serrano, 2004. "Earnings Risk And Demand For Higher Education: A Cross-Section Test For Spain," Economics, Finance and Accounting Department Working Paper Series n1370804, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  7. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2001. "Dispersion in the Economic Return to Schooling," CEPR Discussion Papers 3037, C.E.P.R. Discussion Papers.
  8. Joop Hartog & Erik Plug & Luis Diaz Serrano & Jose Vieira, 2003. "Risk compensation in wages – a replication," Empirical Economics, Springer, vol. 28(3), pages 639-647, July.
  9. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October.
  10. Christiansen, Charlotte & Nielsen, Helena Skyt, 2003. "The Educational Asset Market: A Finance Perspective on Human Capital Investment," Finance Working Papers 02-9, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  11. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
  12. Olson, Lawrence & White, Halbert & Shefrin, H M, 1979. "Optimal Investment in Schooling when Incomes are Risky," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 522-39, June.
  13. Weiss, Yoram, 1972. "The Risk Element in Occupational and Educational Choices," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1203-13, Nov.-Dec..
  14. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society.
  15. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
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Citations

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Cited by:
  1. Wolfgang Nagl, 2012. "Wage Compensations Due to Risk Aversion andSkewness Affection – German Evidence," Ifo Working Paper Series Ifo Working Paper No. 145, Ifo Institute for Economic Research at the University of Munich.
  2. Jürg Schweri & Stefan C. Wolter & Joop Hartog, 2008. "Do Students Expect Compensation for Wage Risk?," Economics of Education Working Paper Series 0011, University of Zurich, Institute for Strategy and Business Economics (ISU).
  3. Díaz Serrano, Luis & Ferrer Carbonell, Ada & Hartog, Joop, 2009. "Risk Attitude And Wage Growth: Replication And Reconstruction," Working Papers 2072/42897, Universitat Rovira i Virgili, Department of Economics.
  4. Diaz-Serrano, Luis & Hartog, Joop, 2004. "Is There a Risk-Return Trade-Off across Occupations? Evidence from Spain," IZA Discussion Papers 1355, Institute for the Study of Labor (IZA).
  5. Diaz-Serrano, Luis, 2004. "Labour Income Uncertainty, Risk Aversion and Home Ownership," IZA Discussion Papers 1008, Institute for the Study of Labor (IZA).
  6. Luis Díaz-Serrano & Joop Hartog, 2006. "Is there a risk-return trade-off in educational choices? Evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 30(2), pages 353-380, May.
  7. Luis Diaz-Serrano, 2003. "Earnings Uncertainty, Risk-Aversion and Homeownership," Economics, Finance and Accounting Department Working Paper Series n135020.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  8. Wolfgang Nagl, 2012. "Better Safe than Sorry? The Effects of Income Risk, Unemployment Risk and the Interaction of these Risks on Wages," Ifo Working Paper Series Ifo Working Paper No. 148, Ifo Institute for Economic Research at the University of Munich.
  9. Luis Diaz-Serrano & J. Hartog, 2004. "Is there a Risk-Return Trade-off across Occupations? Evidence from Spain," Economics, Finance and Accounting Department Working Paper Series n1441004, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  10. C. Simon Fan & Oded Stark, 2011. "A Theory Of Migration As A Response To Occupational Stigma," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 549-571, 05.
  11. Hartog, Joop & Vijverberg, Wim, 2007. "Schools, skills and risk," Economics of Education Review, Elsevier, vol. 26(6), pages 758-770, December.
  12. Mazza, Jacopo & Hartog, Joop, 2011. "Do They Understand the Benefits from Education? Evidence on Dutch High School Students’ Earnings Expectations," IZA Discussion Papers 5714, Institute for the Study of Labor (IZA).
  13. Peter Schneider & Dieter Sadowski, 2008. "The impact of New Public Management (NPM) instruments on PhD education," IAAEG Discussion Papers until 2011 200803, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  14. Diaz-Serrano, Luis, 2004. "On the Negative Relationship between Labor Income Uncertainty and Homeownership: Risk Aversion vs. Credit Constraints," IZA Discussion Papers 1208, Institute for the Study of Labor (IZA).

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