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How Important Is Precautionary Labor Supply?

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  • Robin Jessen
  • Davud Rostam-Afschar
  • Sebastian Schmitz

Abstract

We quantify the importance of precautionary labor supply using data from the German Socio-Economic Panel (SOEP) for 2001-2012. We estimate dynamic labor supply equations augmented with a measure of wage risk. Our results show that married men choose about 2.5% of their hours of work or one week per year on average to shield against unpredictable wage shocks. This implies that about 26% of precautionary savings are due to precautionary labor supply. If self-employed faced the same wage risk as the median civil servant, their hours of work would reduce by 4%.

Suggested Citation

  • Robin Jessen & Davud Rostam-Afschar & Sebastian Schmitz, 2016. "How Important Is Precautionary Labor Supply?," SOEPpapers on Multidisciplinary Panel Data Research 850, DIW Berlin, The German Socio-Economic Panel (SOEP).
  • Handle: RePEc:diw:diwsop:diw_sp850
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    Cited by:

    1. Mariacristina Rossi & Dario Sansone, 2018. "Precautionary savings and the self-employed," Small Business Economics, Springer, vol. 51(1), pages 105-127, June.
    2. Pora, Pierre & Wilner, Lionel, 2020. "A decomposition of labor earnings growth: Recovering Gaussianity?," Labour Economics, Elsevier, vol. 63(C).
    3. 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.
    4. Koumenta, Maria & Pagliero, Mario & Rostam-Afschar, Davud, 2020. "Occupational Licensing and the Gender Wage Gap," GLO Discussion Paper Series 689, Global Labor Organization (GLO).
    5. Alessandro Milazzo & Elena Vigna, 2018. "The Italian Pension Gap: A Stochastic Optimal Control Approach," Risks, MDPI, Open Access Journal, vol. 6(2), pages 1-20, April.
    6. 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

    Keywords

    Wage risk; labor supply; precautionary saving; life cycle; dynamic panel data;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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