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Hours risk, wage risk, and life-cycle labor supply

Robin Jessen and Johannes König

No 771, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: We decompose permanent earnings risk into contributions from hours and wage shocks. In order to distinguish between hours shocks and labor supply reactions to wage shocks we use a life-cycle model of consumption and labor supply. Estimating our model with the Panel Study of Income Dynamics (PSID) shows that both permanent wage and hours shocks play an important role in explaining the cross-sectional variance in earnings growth, but wage risk has greater relevance. Allowing for hours shocks improves the model fit considerably. The empirical strategy allows for the estimation of the Marshallian labor supply elasticity without the use of consumption or asset data. We find this elasticity on average to be negative, but small. The degree of consumption insurance implied by our results is in line with recent estimates in the literature.

Keywords: earnings risk; wage risk; Frisch elasticity; Marshallian elasticity; consumption insurance (search for similar items in EconPapers)
JEL-codes: D31 J22 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lma
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:771

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