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Comparative Advantage and Risk Premia in Labor Markets

Pedro Silos () and German Cubas ()

No 789, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Using the Survey of Income and Program Participation (SIPP) we estimate quarterly labor earnings risk across 21 industries of the US economy. We document a significant and positive association between earnings risk (both permanent and transitory) and average log-earnings across industries. The Finance sector is 50% riskier than Government which implies a mean earnings premium of 20%. We develop an equilibrium framework to analyze the interplay between volatility in labor earnings and comparative advantage in determining the level of earnings across industries. We use the model to decompose how much of the empirical correlation represents compensation for risk and how much represents selection. The positive association between permanent risk and earnings is compensation for risk, but selection is responsible for the observed relationship between temporary risk and mean earnings.

Date: 2013
New Economics Papers: this item is included in nep-dge
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Related works:
Working Paper: Comparative Advantage and Risk Premia in Labor Markets (2013) Downloads
Working Paper: Comparative Advantage and Risk Premia in Labor Markets (2012) Downloads
Working Paper: Comparative advantage and risk premia in labor markets (2012) Downloads
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