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How important is precautionary labour supply?

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  • Robin Jessen
  • Davud Rostam-Afschar
  • Sebastian Schmitz

Abstract

We quantify the importance of precautionary labour supply defined as the difference between hours supplied in the presence of risk and hours under perfect foresight. Using the German Socio-Economic Panel from 2001 to 2012, we estimate the effect of wage risk on labour supply and test for constrained adjustment of labour supply. We find that married men choose on average about 2.8% of their hours of work to shield against wage shocks. The effect is strongest for self-employed, who we find to be unconstrained in their hours choices, but also relevant for other groups with more persistent hours constraints. If the self-employed faced the same wage risk as the median civil servant, their hours of work would be reduced by 4.5%.

Suggested Citation

  • Robin Jessen & Davud Rostam-Afschar & Sebastian Schmitz, 2018. "How important is precautionary labour supply?," Oxford Economic Papers, Oxford University Press, vol. 70(3), pages 868-891.
  • Handle: RePEc:oup:oxecpp:v:70:y:2018:i:3:p:868-891.
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    Cited by:

    1. Dora Tuda, 2020. "Desired hours worked over the business cycle: stylised facts for European countries," Trinity Economics Papers tep1320, Trinity College Dublin, Department of Economics, revised Aug 2020.
    2. Mariacristina Rossi & Dario Sansone, 2018. "Precautionary savings and the self-employed," Small Business Economics, Springer, vol. 51(1), pages 105-127, June.
    3. Pora, Pierre & Wilner, Lionel, 2020. "A decomposition of labor earnings growth: Recovering Gaussianity?," Labour Economics, Elsevier, vol. 63(C).
    4. Davud Rostam‐Afschar & Kristina Strohmaier, 2019. "Does Regulation Trade Off Quality against Inequality? The Case of German Architects and Construction Engineers," British Journal of Industrial Relations, London School of Economics, vol. 57(4), pages 870-893, December.
    5. Koumenta, Maria & Pagliero, Mario & Rostam-Afschar, Davud, 2020. "Occupational Licensing and the Gender Wage Gap," GLO Discussion Paper Series 689, Global Labor Organization (GLO).
    6. Alessandro Milazzo & Elena Vigna, 2018. "The Italian Pension Gap: A Stochastic Optimal Control Approach," Risks, MDPI, vol. 6(2), pages 1-20, April.
    7. Alessandro Milazzo & Elena Vigna, 2018. "“The Italian Pension Gap: a Stochastic Optimal Control Approach"," CeRP Working Papers 179, Center for Research on Pensions and Welfare Policies, Turin (Italy).

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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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