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Labor Supply and Consumption Smoothing When Income Shocks Are Non-Insurable

  • Danzer, Alexander M.

    ()

    (University of Munich)

The paper investigates how employees use secondary employment to smooth out consumption shortfalls from non-anticipated wage shocks in their main employment. The identification strategy exploits surprising changes in firms’ wage payment and repayment behavior in Ukraine. Based on unique nationally representative panel data, the econometric approach accounts for workers' unobserved heterogeneity and measurement error in the wage shock information. The estimated labor supply responses suggest that secondary activities are used as temporary coping strategies against wage shocks and that they closely follow the lifecycle of wage arrears. Households that engage in secondary employment can successfully smooth their consumption. The results are robust to several alternative hypotheses concerning the observed labor supply pattern.

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File URL: http://ftp.iza.org/dp5499.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5499.

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Length: 68 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5499
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