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Compensation for Earnings Risk under Worker Heterogeneity

  • Peter Berkhout

    ()

    (Formerly SEO (Foundation for Economic Research) Amsterdam, now EIB Amsterdam (Economic Institute for the Dutch Construction Industry) Basisweg 10. 1043 AP Amsterdam)

  • Joop Hartog

    ()

    (Department of Economics, Universiteit van Amsterdam, Fellow Tinbergen Institute, AIAS, IZA, and CESifo)

  • Dinand Webbink

    ()

    (CPB Netherlands Bureau for Economic Policy Analysis, Van Stolkweg 14, 2585 JR, The Hague, and associated with SCHOLAR)

We use two large data sets to estimate the Risk Augmented Mincer equation and test for risk compensation in expected earnings. We replicate earlier findings of a positive premium for risk and a negative premium for skew and add confirmation of the key results if we control for individual ability. We compare risk compensation and risk distributions between some labor market groups and find that immigrants and natives do not differ in risk attitudes, that public sector workers are undercompensated for their risk, and that risk compensation by gender is not fully consistent with higher risk aversion for women. We express concern that a linear compensation model may be too simple.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 76 (2010)
Issue (Month): 3 (January)
Pages: 762-790

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Handle: RePEc:sej:ancoec:v:76:3:y:2010:p:762-790
Contact details of provider: Web page: http://www.southerneconomic.org/

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  1. Steven J. Davis & Paul Willen, 2000. "Occupation-Level Income Shocks and Asset Returns: Their Covariance and Implications for Portfolio Choice," CRSP working papers 523, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
  3. Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
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