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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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    References listed on IDEAS

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    Cited by:

    1. Cubas, German & Silos, Pedro, 2017. "Social Insurance and Occupational Mobility," MPRA Paper 83020, University Library of Munich, Germany.
    2. Wenbiao Cai, 2016. "Risk, Selection and Productivity Differences," Departmental Working Papers 2016-02, The University of Winnipeg, Department of Economics.

    More about this item

    Keywords

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

    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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