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

Alexander Danzer ()

No 5499, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: 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.

Keywords: subsidiary farming; consumption smoothing; wage shock; dual job holding; reaction time to shocks (search for similar items in EconPapers)
JEL-codes: J22 J33 O17 P36 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2011-02
New Economics Papers: this item is included in nep-bec and nep-lab
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