WAGE VOLATILITY AND CHANGING PATTERNS OF LABOR SUPPLY

Jay H. Hong, Byoung Hoon Seok and Hye Mi You

International Economic Review, 2019, vol. 60, issue 2, 595-630

Abstract: Over the past few decades, the skilled–unskilled hours differential for U.S. men increased when the skill premium rose sharply, in contrast with dominant income effects. Based on PSID data, we show that over the 1967–2000 period, skilled men experienced a three times larger increase in wage volatility than unskilled men. With the rise in wage volatility, our general equilibrium incomplete markets model generates a 2.7 hours increase in the hours differential whereas it increased by 1.4 hours in the data. We find that hours adjustments are important for self‐insurance in the short run, whereas precautionary savings play a crucial role eventually.

Date: 2019
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