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Career Choice And The Risk Premium In The Labor Market

Author

Listed:
  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • German Cubas

    (University of Houston)

Abstract

Is risk priced in the labor market? We document a strong, robust, and positive correlation between average earnings and the variance of both temporary and permanent idiosyncratic shocks to earnings across 21 US industries. However, since workers are heterogeneous in their abilities, the correlation may be entirely driven by selection. What portion of the correlation is compensation for risk and what portion is compensation for unobserved abilities? We construct an equilibrium model with imperfect insurance of labor earnings shocks. The variance of shocks varies across industries. An industry-specific ability drives a worker's comparative advantage, which interacts with her risk aversion to determine an optimal career choice. We find that permanent shocks are highly priced, whereas temporary shocks are not. Two additional results arise. First, workers accumulate different levels of wealth depending on the employment industry. Second, compensation for risk explains a sizable fraction of observed cross-industry differences in labor earnings.

Suggested Citation

  • Pedro Silos & German Cubas, 2015. "Career Choice And The Risk Premium In The Labor Market," 2015 Meeting Papers 1036, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1036
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. German Cubas & Pedro Silos, 2020. "Social Insurance And Occupational Mobility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 219-240, February.
    2. Corina Boar, 2020. "Dynastic Precautionary Savings," NBER Working Papers 26635, National Bureau of Economic Research, Inc.
    3. Eleanor W. Dillon, 2018. "Risk and Return Trade-Offs in Lifetime Earnings," Journal of Labor Economics, University of Chicago Press, vol. 36(4), pages 981-1021.
    4. Wenbiao Cai, 2016. "Risk, Selection and Productivity Differences," Departmental Working Papers 2016-02, The University of Winnipeg, Department of Economics.
    5. Daniel J. Henderson & Anne-Charlotte Souto & Le Wang, 2020. "Higher-Order Risk–Returns to Education," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 13(11), pages 1-25, October.
    6. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2019. "Staying the Course or Rolling the Dice: Time Horizon’s Effect on the Propensity to Take Risk," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 42(1), pages 66-85.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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