Education, Employment and Wage Risk

Mario Padula and Luigi Pistaferri

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We measure the return to education by accounting for differences in wage and unemployment risk confronted by individuals with different levels of education. When markets are incomplete, risk-averse individuals value jobs to which less income risk is associated. In this case a measure of the return to education based only on the expected post-schooling wages can be misleading. We estimate the implicit return to schooling under four different scenarios: no uncertainty, unemployment risk, wage risk, and both wage and unemployment risk. The empirical analysis uses US and Italian microeconomic data. The main finding is that the return of schooling is downward biased if no account is made for risk.

Date: 2001-08-01
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