Wage Risk Research Articles

WAGE RISK, EMPLOYMENT RISK, AND THE RISE IN WAGE INEQUALITY

AbstractU.S. male residual wage inequality rose, and the employment rate fell between 1983 and 2013. Using a structural labor market model, we show that rising idiosyncratic wage risk and lower taxes at the bottom of the earnings distribution are the main forces behind rising wage inequality. The former contributes to the falling employment rate. Falling real wages and rising disability risk further depressed employment of workers without a college degree and rising exogenous job destruction depressed employment of workers with a college degree. Higher idiosyncratic risk entails large welfare losses with the largest losses among workers without a college degree.

Wage Risk and Government and Spousal Insurance

Abstract The extent to which households can self-insure depends on family structure and wage risk. We calibrate a model of couples and singles’ savings and labour supply under two types of wage processes. The first wage process is the canonical—age-independent, linear—one that is typically used to evaluate government insurance provision. The second wage process is a flexible one. We use our model to evaluate the optimal mix of the two most common types of means-tested benefits—IW versus income floor. The canonical wage process underestimates wage persistence for women and thus implies that IW benefits should account for most benefit income. In contrast, the richer wage process that matches the wage data well, implies that the income floor should be the main benefit source, similarly to the system in place in the U.K. This stresses that allowing for rich wage dynamics is important to properly evaluate policy.

Determining Rice Farming Risk Priorities in North Aceh Regency.

North Aceh is the main rice-producing district in the Indonesian province of Aceh. This research aims to determine the level of risk, the impact of risk, and the risks that must be prioritized in rice farming businesses in North Aceh Regency. The type of data used in this research is primary and secondary data. Data was collected using a survey method involving 180 respondents using a snowball sampling technique. The data analysis method used in this research is the Risk Calculator method. Risk Calculator is a method for determining priority risks. We found that the risks that need to be a top priority are bird pest attacks, rat pest attacks, Kresek disease attacks, blast disease attacks, and the risk of expensive farm labor wages and high harvest costs.

Hours risk and wage risk: repercussions over the life cycle*

AbstractWe decompose earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks, we formulate a life‐cycle model of consumption and labor supply. For estimation, we use data on married American men from the Panel Study of Income Dynamics. Permanent wage shocks explain 31 percent of total risk, permanent hours shocks 21 percent. Progressive taxation attenuates cross‐sectional earnings risk, but its life‐cycle insurance impact is much smaller. At the mean, a one‐standard‐deviation hours shock raises lifetime income by 11 percent, a wage shock by 13 percent.

Contracting in Peer Networks

ABSTRACTWe consider multiagent multifirm contracting when agents benchmark their wages to those of their peers, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals, a “rat race” emerges: agents are more productive, with effort that can exceed the first best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.

Equal treatment in the single market? Labour market opportunities for migrants with a European and a non-European background

This article discusses whether the single market contributes to the Europeanisation of labour markets by comparing the employment and wage conditions of European and non-European migrants. Such a Europeanisation can be expected from the fact that the single market facilitates the free movement of people, that it simplifies the recognition of qualifications, the harmonisation of social rights and the extension of social benefits to persons from other EU member states. By focusing on the distinction between natives, EU migrants, and third-country nationals with and without European citizenship, it can be shown that the labour market participation, unemployment, outsider, overeducation, and wage risks of these groups clearly differ. In particular, the differences between third-country and European migrants can be interpreted as indicators for the positive effects of a European-wide recognition of diplomas and the better legal position of EU migrants, while the higher cumulative employment and wage risks of migrants in contrast to natives may also the result of common, non-legal barriers and challenges. The single market and its rules thus facilitate the non-discriminatory inclusion of European citizens, better preserving their qualifications and reducing the risks of migration decisions.

A New Measure of Wage Risk: Occupation-Specific Evidence for Germany

This study proposes a new measure of wage risk based on estimated probabilities to earn an hourly wage that is below some specific lower quantile of the wage distribution. Using the German SOEP as an information rich data base, we determine wage risks overall and for nine job categories during the period from 1992 until 2015. We find that the low-wage workers in Germany are worse off after the Hartz reforms. In Western Germany this evidence stems from both a reduction of low wages and an increase of wage risk. In Eastern Germany, it is largely due to increased wage risk. Moreover, overall evidence hides important developments at the occupational level.

Wage Risk and the Skill Premium

Abstract The skill premium has increased significantly in the United States in the last five decades. During the same period, individual wage risk has also increased. This paper proposes a mechanism through which a rise in wage risk increases the skill premium. Intuitively, a rise in uninsured wage risk increases precautionary savings, thereby boosting capital accumulation, which increases the skill premium due to capital-skill complementarity. Using a quantitative macroeconomic model, we find that the rise in wage risk observed between 1967 and 2010 increases the skill premium significantly. This finding is robust across a variety of model specifications.

Wage Risk and the Skill Premium

Wage Risk and the Skill Premium

Explaining equity home bias using hedging motives against real exchange rate and wage risks

This paper derives an optimal portfolio equilibrium using a two-country DSGE model with non-separable utility and two assets (home and foreign equities). We solve the model using a second-order approximation method, which enables us to derive a closed-form solution for optimal equity holdings. When the elasticity of substitution between home and foreign goods is below around 1.2, the covariance between wage and equity return becomes negative and the covariance between price and equity return becomes positive. In this case, home equity provides hedging against wage and real exchange rate risks and optimal portfolio equilibrium shows a home bias. In addition, we show that equity holding bias (either home or foreign) is amplified under separable utility case, implying that previous studies with separable utility may have overestimated equity holding bias.

Wage Risk and Portfolio Choice: The Role of Correlated Returns

Wage Risk and Portfolio Choice: The Role of Correlated Returns

Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation

We show that a calibrated life cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri, and Saporta-Eksten (2016) in US data. In the model, 35 percent of male and 18 percent of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32 percent and 19 percent. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intrahousehold income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half. (JEL D15, H21, H24, J16, J22, J31)

Contracting in Peer Networks

We consider multi-agent multi-firm contracting when agents benchmark their wages to a weighted average of their peers, where weights may vary within and across firms. Despite common shocks, compensation benchmarking can undo performance benchmarking, so that wages load positively rather than negatively on peer output. Although contracts appear inefficient, when a single principal commits to a public contract, the optimal contract hedges agents’ relative wage risk without sacrificing efficiency. Moreover, the principal can exploit any asymmetries in peer effects to enhance profits. With multiple principals, or a principal that is unable to commit, a “rat race” emerges in which agents are more productive, but wages increase even more, reducing profits and undermining efficiency. Effort levels are too high rather than too low, and can exceed first best. Wage transparency and disclosure requirements exacerbate these effects. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia

We structurally estimate a life-cycle model of consumption, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of Australia’s Age Pension system and income tax policy on labor supply, consumption and retirement. Our model accounts for human capital, savings, uninsurable wage risk and credit constraints. We account for “bunching” of hours by assuming a discrete set of hours levels, and we investigate labor supply on both the intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life-cycle. Our results imply that Australia’s Age Pension system as currently designed is poorly targeted. Our simulations suggest that a doubling of taper rates, combined with a 5.9% reduction of income tax rates, would be budget neutral and Pareto improving.

Insiders under pressure: Flexibilization at the margins and wage inequality

AbstractThe rise of flexible employment in advanced democracies has been predominantly studied in the insider-outsider framework of the dualization literature. However, against the background of rising income inequality, it seems questionable to assume that all labor market insiders are equally affected by flexibilization. This paper explores whether flexibilization increases wage inequality among labor market insiders. I argue that flexibilization exposes insiders to a set of wage risks that are concentrated among low- and middle-income insiders, creating downward wage pressure on those insiders. The empirical analysis, covering 22 democracies between 1985 and 2016, finds that the deregulation of non-standard employment is associated with declining wage shares of low-income and middle-income earners, while top earners benefit. These major distributional shifts imply an important qualification of the dualization literature: rather than pitting insiders against outsiders, flexibilization ‘at the margins’ seems to exacerbate divides among insiders.

Optimal progressivity with age-dependent taxation

This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.

Wage Risk and the Skill Premium

Wage Risk and the Skill Premium

Hours Risk and Wage Risk: Repercussions over the Life-Cycle

We decompose permanent earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks we formulate a life-cycle model of consumption and labor supply. Both permanent wage and hours shocks are important to explain earnings risk, but wage shocks have greater relevance. Progressive taxation strongly attenuates cross-sectional earnings risk, its life-cycle insurance impact is much smaller. At the mean, a positive hours shock of one standard deviation raises life-time income by 10%, while a similar wage shock raises it by 12%.

Wage Risk and Government and Spousal Insurance

Wage Risk and Government and Spousal Insurance

Gender and University: Factors that Influence Peruvian Midwives’ Employment and Wages

Although a reduction in economic inequality has been reported in Peru, there are wage differences for professionals in the labour market mediated by structural determinants. Gender and university could be related to this problem. A secondary analysis of the “National Survey of University Graduates and Universities, 2014” was performed to analyse the influence of gender and university on employment and wages in the Peruvian midwifery labour market through a multivariate analysis. The chi square, p-value, odds ratio – crude and adjusted – and a 95 per cent confidence interval were calculated. The results allow concluding that gender and university determine unemployment and low wages in the Peruvian midwifery labour market. Female health workers experience a higher risk of unemployment, working in jobs that are not related to their professional training, and low payment. Midwives from public or upcountry universities experience a higher risk of unemployment and low wages. Working in jobs that are not related to the professional training was determined by coming from private and upcountry universities; it was a factor associated with low wages and the probability for having to do two jobs. It is necessary to improve governmental interventions to eliminate these barriers, of which the issue of remuneration is the most important.