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Do Wages Really Compensate for Risk Aversion and Skewness Affection?

Author

Listed:
  • Hartog, Joop

    () (University of Amsterdam)

  • Vijverberg, Wim P.

    () (CUNY Graduate Center)

Abstract

Utility theory suggests that foreseeable risk should increase the compensation for work. This paper expands on this notion: on basis of utility theory, people should care not only about risk but also about the skewness in the distribution of the compensation paid. In particular, because the degree of risk aversion ought to decrease with income, people should appreciate a small chance of a substantial gain; they should exhibit an “affection” for skewness. To test these hypotheses, this paper carefully develops various measures of risk and skewness by occupational/educational classification of the worker and finds supportive evidence: wages rise with occupational earnings variance and decrease with skewness. In order to identify the discount rate and the degree of risk aversion, we also apply structural modelling of education and occupational choice and allow for non-lognormal wage distributions.

Suggested Citation

  • Hartog, Joop & Vijverberg, Wim P., 2002. "Do Wages Really Compensate for Risk Aversion and Skewness Affection?," IZA Discussion Papers 426, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp426
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    Cited by:

    1. Simone N. Tuor & Uschi Backes-Gellner, 2010. "Risk-return trade-offs to different educational paths: vocational, academic and mixed," International Journal of Manpower, Emerald Group Publishing, vol. 31(5), pages 495-519, August.
    2. Christiansen, Charlotte & Nielsen, Helena Skyt, 2002. "The Educational Asset Market: A Finance Perspective on Human Capital Investment," Working Papers 02-10, University of Aarhus, Aarhus School of Business, Department of Economics.
    3. Diaz-Serrano, Luis, 2004. "Labour Income Uncertainty, Risk Aversion and Home Ownership," IZA Discussion Papers 1008, Institute for the Study of Labor (IZA).
    4. Diaz-Serrano, Luis, 2004. "Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU Countries," IZA Discussion Papers 1396, Institute for the Study of Labor (IZA).
    5. 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.
    6. Guiso, Luigi & Paiella, Monica, 2004. "The Role of Risk Aversion in Predicting Individual Behaviours," CEPR Discussion Papers 4591, C.E.P.R. Discussion Papers.
    7. Luis Díaz-Serrano & Joop Hartog, 2006. "Is there a risk-return trade-off in educational choices? Evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 30(2), pages 353-380, May.
    8. Brodaty, Thomas & Gary-Bobo, Robert J. & Prieto, Ana, 2006. "Risk Aversion and Human Capital Investment: A Structural Econometric Model," CEPR Discussion Papers 5694, C.E.P.R. Discussion Papers.
    9. Koerselman, Kristian & Uusitalo, Roope, 2014. "The risk and return of human capital investments," Labour Economics, Elsevier, vol. 30(C), pages 154-163.
    10. Luis Diaz-Serrano & Joop Hartog & Helena Skyt Nielsen, 2008. "Compensating Wage Differentials for Schooling Risk in Denmark," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(4), pages 711-731, December.
    11. Christiansen, Charlotte & Joensen, Juanna Schroter & Nielsen, Helena Skyt, 2007. "The risk-return trade-off in human capital investment," Labour Economics, Elsevier, vol. 14(6), pages 971-986, December.
    12. Joop Hartog & Hans van Ophem & Simona Maria Bajdechi, 2004. "How Risky is Investment in Human Capital?," CESifo Working Paper Series 1261, CESifo Group Munich.
    13. Santiago Budria, 2010. "Schooling and the distribution of wages in the European private and public sectors," Applied Economics, Taylor & Francis Journals, vol. 42(8), pages 1045-1054.
    14. Beladi, Hamid & Sinha, Chaitali & Kar, Saibal, 2016. "To educate or not to educate: Impact of public policies in developing countries," Economic Modelling, Elsevier, vol. 56(C), pages 94-101.
    15. Heckman, James J. & Lochner, Lance J. & Todd, Petra E., 2006. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," Handbook of the Economics of Education, Elsevier.
    16. Diaz-Serrano, Luis & Hartog, Joop, 2004. "Is There a Risk-Return Trade-Off across Occupations? Evidence from Spain," IZA Discussion Papers 1355, Institute for the Study of Labor (IZA).
    17. Luis Diaz-Serrano & J. Hartog, 2004. "Is there a Risk-Return Trade-off across Occupations? Evidence from Spain," Economics, Finance and Accounting Department Working Paper Series n1441004, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    18. Anders Forslund & Oskar Nordström Stans, 2006. "Swedish Youth Labour Market Policies Revisited," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 75(3), pages 168-185.
    19. Peter Schneider & Dieter Sadowski, 2008. "The impact of New Public Management (NPM) instruments on PhD education," IAAEG Discussion Papers until 2011 200803, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).

    More about this item

    Keywords

    wage risk compensation; Wage variability;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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