Labor Income Indices Designed for Use in Contracts Promoting Income Risk Management
The authors propose that labor income indices be used to define settlements in many contracts such as labor contracts, indexed bonds, or income securities. They discuss the issues in producing labor income indices for such uses, and develop prototype indices using U.S. data from the Panel Study of Income Dynamics (PSID). People are grouped by a clustering algorithm based on an estimated transition matrix between jobs, by education level, and by skill category. The groupings are defined so that few people move between them. For each grouping The authors generate a labor income index (1968-87) using a hedonic repeated-measures regression method. The indices show substantial variability through time, confirming the potential importance of the use of such indices in contracts. There is also substantial variability across groupings, as for example between the agriculture/labor grouping and other groupings, confirming the importance of using the grouping indices rather than aggregate indices in contracts. Copyright 1998 by The International Association for Research in Income and Wealth.
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