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CAREER CHOICE AND THE RISK PREMIUM IN THE LABOR MARKET

Pedro Silos () and German Cubas ()

No 1036, 2015 Meeting Papers from Society for Economic Dynamics

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.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-upt
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Journal Article: Career Choice and the Risk Premium in the Labor Market (2017) Downloads
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