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Wage Risk and the Skill Premium

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  • Ctirad Slavik
  • Hakki Yazici

Abstract

The skill premium has increased significantly in the United States in the last five decades. During the same period, individual wage risk has also increased. This paper proposes a mechanism through which a rise in wage risk increases the skill premium. Intuitively, a rise in uninsured wage risk increases precautionary savings, thereby boosting capital accumulation, which increases the skill premium due to capital-skill complementarity. Using a quantitative macroeconomic model, we find that the rise in wage risk observed between 1967 and 2010 increases the skill premium significantly. This finding is robust across a variety of model specifications.

Suggested Citation

  • Ctirad Slavik & Hakki Yazici, 2017. "Wage Risk and the Skill Premium," CERGE-EI Working Papers wp609, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp609
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    References listed on IDEAS

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    Cited by:

    1. Takahashi, Shuhei & Yamada, Ken, 2022. "Understanding international differences in the skill premium: The role of capital taxes and transfers," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    2. Riska Dwi Wulandari & Susilo & Dias Satria, 2018. "Income Inequality between Formal-Informal Employees Based on Education Group," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 64, pages 25-42, Juni.
    3. Shuhei Takahashi & Ken Yamada, 2017. "The Impact of Taxes and Transfers on Skill Premium," KIER Working Papers 976, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    skill premium; wage risk; capital-skill complementarity; precautionary savings;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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