Wage Risk Research Articles

A life-cycle analysis of defined benefit pension plans

This paper employs a lifecycle model from the consumption–savings literature to examine the tradeoffs between defined benefit and defined contribution pension plans. We examine the effects of varying risk aversion, varying initial income and financial wealth, and varying wage processes (that may be correlated with returns on the risky asset).Results indicate that wage-indexed claims are not an optimal vehicle for retirement policy if the decision to participate is made early in life, because individuals hold most of their wealth in their human capital and would not wish to increase their exposure to income shocks. Later in life, after most of a worker's human capital has been converted to financial assets, defined benefit pension plans help increase diversification by reducing exposure to financial market risk. The access that defined benefit plans provide to annuities markets and possible guaranteed rates of return over the risk-free rate increase the value of defined benefit plans to workers. The model also predicts that wage-indexed claims will be more valuable when equity markets provide low expected returns or are highly variable and when annuity markets are inefficient.The model illustrates two economic functions performed by defined benefit plans. Firstly, DB plans pool individual wage risks. This allows older workers to buy a wage-linked security that increases their exposure to wage risks. Secondly, they create a group annuities market that reduces the cost of adverse selection.

Financial markets, the structure of long-term investments and labour income risks

The paper develops a model to analyse the feedback between financial markets, long-term capital investments and the risk of labour incomes. We study a situation where firms are owned by entrepreneurs, who are able to share and diversify their income risk by trading on financial markets. Workers, in contrast, cannot short-sell the flows from future labour endowments and thus do not have the same opportunities. We derive two central results. Firstly, even if financial markets offer perfect risk-sharing opportunities for entrepreneurs, the participation restriction for labour incomes leads to a constrained inefficient market allocation. The constrained inefficiency arises because the effect of long-term investments on the risk of wages is not internalized by state prices. Secondly, we show that in general it is not true that workers indirectly benefit when we go from a situation with no financial markets to a situation with perfect financial markets for entrepreneurs but restricted participation for workers. The results suggest that a policy solution might require either to close some financial markets or to create new ones. We argue why there is a strong case for the creation of new markets rather than for closing existing ones.

Intergenerational Risk Sharing and Asset Returns

We investigate portfolio allocations and asset returns within a stochastic overlapping generations economy with risky equity, generation-wide labor income shocks and portfolio non-negativity constraints. Our model assumes a difference stationary endowment process, a young generation that faces labor income uncertainty and a positive correlation between the wage risk of the young and middle generations. The model is unable to match the level of the risk-free rate or the volatility of equity returns. We encounter the risk-free rate puzzle when the cross-sectional distribution of labor income is calibrated to a Panel Study of Income Dynamics survey. We find that the young generation participates in the equity markets for conventional levels of risk aversion and realistic labor income profiles. In contrast to Constantinides, Donaldson and Mehra (2001), our conclusion is that intergenerational heterogeneity and borrowing constraints alone cannot explain the equity premium puzzle. We suggest further research on idiosyncratic labor income shocks within a generation.

The cost of business cycles and the stabilization value of unemployment insurance

This paper offers a new perspective on why labor market policies aimed at reducing the cost of business cycles may be warranted and how such policies can be designed in order to improve welfare. To this end, we develop a quantitative dynamic equilibrium model to illustrate how the contractual structure of the labor market may hide significant undiversified wage risk induced by aggregate fluctuations. The environment analyzed is such that the only imperfectly diversified risk workers bear is the risk of losing their job when the market for new contracts is depressed. When we fit the model to replicate the amount of wage variation estimated from micro-data, we obtain estimates of the potential value of stabilization policies that are substantially larger than those found in the literature. We use this framework to examine several policy issues and, in particular, to show why state-contingent unemployment insurance may dominate non-contingent unemployment insurance schemes.

Compensating Differentials for Dangerous Work in a Labour Discipline Model

Wage compensation for occupational risk in Walrasian models has three properties: it generates efficient levels and allocations of risk, it enables workers in dangerous jobs to be just as well off, ceteris paribus, as workers in safe jobs, and it permits the estimation of willingness to pay schedules for safety from labour market data. This paper tests the status of these three properties under a simple model in which variable labour effort is induced by wage–safety rents and the threat of dismissal. It finds that all three must be modified, and that these results are robust over alternative specifications of labour market structure, the cost of providing safety, and the specification of the production function. The implications of this analysis are considered for both public policy questions and the interpretation of wage–risk studies.

Labor Supply, Risk Aversion and Economic Reform in China

Economic reform in China has created a small but fast-growing private sector that has spurred rapid productivity growth. Growth of the private sector is predicated upon continued labor movements away from state-run industries and into private firms. This paper presents a theory of labor market sectoral choice demonstrating that three factors determine private sector labor supply--the difference in wages between the state and private sectors, private sector wage risk and risk aversion. Estimation of the model using survey data provides strong support for the theory. We find that the riskiness of private sector earnings has a greater effect in discouraging workers from taking jobs in private firms than the wage premium has in attracting workers.

Unions, employment risks, and market provision of employment risk differentials

The role of unions in providing compensating differentials for wage and hours risk is analyzed. Unions are shown to increase wages for workers in more risky jobs. A negative compensating differential for nonunion workers is taken as evidence of worker-specific, or supply-side risk. This component of risk is removed by controlling for union status, based on the belief that unionized firms will be more likely to filter out high-risk unproductive workers. Hours risk is compensated for in the labor market, while wage risk is not.

Wage risk and the Lee, Liaw, and Rahman model

In an article in this journal, Lee, Liaw, and Rahman assumed systematic price uncertainty and a generalized Cobb-Douglas technology to show that β is negatively related to firm market power and capital intensity. They also showed that market power mitigates the negative effect of capital intensity. This paper demonstrates that these results stem from assuming that price uncertainty is the only source of systematic risk. With wage uncertainty introduced, all the relationships derived by the authors may reverse direction. Furthermore, restriction to a Cobb-Douglas technology is unnecessary because the relationships apply to any homothetic transform of a homogeneous function.

Migration and market wage risk.

The author presents an approach to the analysis of labor migration that incorporates the role of market wage variability as a source of information in individual migration decisions. "The focus...is on quantifying the effects of the origin market acting through amenities and the share of market-specific wage variability as it affects forecasts of alternative wages and forecast precision. A subsample of employed males...from the [U.S.] National Longitudinal Survey of Youth (NLS) age 16 to 22 years is used for estimation. The empirical results are consistent with the theoretically predicted relationship between migration propensities and regional differences in the information content of wages. In addition, the results provide evidence that risk aversion deters migration given uncertainty, measured by forecast precision, about alternative market wage levels."

Wage Uncertainty and Competitive Equilibrium in Labour Markets

This paper analyzes the effect of wage-rate uncertainty on long-run competitive equilibrium for a labor market made up of heterogeneous workers. The authors show that, if workers are risk-averse, an increase in wage rate uncertainty always lowers aggregate hours of work and increases the expected wage. They also characterize precisely the class of distribution changes that decrease (or increase) aggregate hours of work and use this result to construct a Pareto-improving negative income tax scheme. Finally, the authors demonstrate that an increase in risk aversion has the same qualitative effect on aggregate hours of work and the expected wage as an increase in wage risk. Copyright 1994 by The London School of Economics and Political Science.

Risk-Taking and Optimal Taxation with Nontradable Human Capital

What are the effects of taxation on individual/entrepreneurs’ risk-taking behavior? This paper re-examines this old question in a continuous time life-cycle model. We demonstrate that the stream of uncertain income from human capital has systematic effects on demand for the risky physical capital asset. If labor supply is inelastic and real wages are known with certainty, then a labor income tax will reduce holdings of the risky physical asset. However, if there are random fluctuations in labor income, then the effect depends on the nature of interaction between wage risk and investment income risk. A labor income tax may actually raise demand for the risky capital asset if human capital risk and physical capital risk are positively correlated. The idiosyncratic risk and nontradability of human capital also have implications for optimal taxation. When the insurance and disincentive effects are jointly taken into account, a Pareto efficient tax structure implies a strictly positive tax rate.

WAGE DIFFERENTIALS AND RISK OF DEATH: COMMENT

Economic InquiryVolume 24, Issue 3 p. 505-508 WAGE DIFFERENTIALS AND RISK OF DEATH: COMMENT J. PAUL LEIGH, J. PAUL LEIGH *Departments of Preventive Medicine and Economics, University of Kentucky. The author wishes to thank Stuart Low and Lee McPheters who graciously made their data available. Tom Means and Steve Mehay provided useful comments.Search for more papers by this author J. PAUL LEIGH, J. PAUL LEIGH *Departments of Preventive Medicine and Economics, University of Kentucky. The author wishes to thank Stuart Low and Lee McPheters who graciously made their data available. Tom Means and Steve Mehay provided useful comments.Search for more papers by this author First published: July 1986 https://doi.org/10.1111/j.1465-7295.1986.tb01827.xCitations: 2 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Citing Literature Volume24, Issue3July 1986Pages 505-508 RelatedInformation

WAGE DIFFERENTIALS AND RISK OF DEATH: REPLY

WAGE DIFFERENTIALS AND RISK OF DEATH: REPLY

Wage policy, competitiveness and risk management: The internal conflicts of dutch economic policy

Lohnpolitik, WettbewerbsfAhigkeit und Risiko-Management: Die internen Konflikte der niederlAndischen Wirtschaftspolitik. - Dieser Aufsatz untersucht empirisch einige mogliche Grunde fur die Fortfuhrung der Einkommenspolitik in einer Wirtschaft, in der die Inflationsrate unter 2 vH gefallen ist. In der Annahme, da\ die Politiker wenigstens versuchen sollten, rationale Entscheidungen im Hinblick auf die offiziell genannten Ziele zu treffen, wird die ubliche Gewi\heits-Aquivalenz-Strategie (die gegenuber dem Risiko invariant ist) mit einer Risiko-Vermeidungs-Strategie verglichen. Fast der ganze Unterschied zwischen den beiden Strategien liegt in der Art, wie die relative WettbewerbsfAhigkeit benutzt wird, um Produktion, Au\enhandel und BeschAftigung zu fordern oder die Kaufkraft zu schutzen. Die WettbewerbsfAhigkeit wird uber die relativen Lohnkosten und eine Einkommenspolitik kontrolliert. Der Gewi\heits-Aquivalenz-Ansatz verlangt eine BeschrAnkung der Lohnsteigerungen, wAhrend die Risiko-Vermeidungs-Strategie eine anpassungsfAhige Einkommenspolitik einschlie\t. Politique des salaires, capacite concurrentielle et management de risque: Les conflits internes de la politique economique des Pays-Bas. - Cet article examine empiriquement quelques motivations possibles de maintenir la politique de revenu dans une economie ou l’inflation est tombee au-dessous de 2 pourcent. En supposant que les politiciens devraient au moins essayer a faire des choix rationnels pour les buts indiques dans les publications officielles, la strategie habituelle de certitude equivalente (qui est invariee vis-a-vis le risque) est comparee avec une strategie qui evite le risque. Presque la difference totale entre les deux strategies est derivee de la maniere comment la capacite concurrentielle relative est utilisee pour promouvoir la production, le commerce exterieur et l’emploi, ou pour proteger le pouvoir d’achat. La capacite concurrentielle est controllee via des couts relatifs de la main d’∄uvre et une politique de revenu. L’approche de certitude equivalente rend necessaire de restreindre la hausse des salaires pendant qu’une strategie qui evite le risque implique une politique de revenu accommodante. Politica salarial, competitividad y control de riesgo: los conflictos internos en la polftica economica holandesa. - Este trabajo examina empiricamente algunas motivaciones posibles para el mantenimiento de una politica de ingresos en una economia en la cual la tasa de inflacion ha caido por debajo del 2 por ciento. Asumiendo que los politicos responsables debieran de por lo menos intentar decidir racionalmente de acuerdo a los objetivos indicados en publicaciones oficiales, la tradicional estrategia del equivalente de certeza (que es invariante frente al riesgo) es comparada con una estrategia de aversion al riesgo. Casi en su totalidad, la diferencia entre las dos consiste en la forma en la cual se utiliza la competitividad relativa para promover la produccion, el comercio y el empleo o para proteger el poder de compra. La competitividad es controlada atraves de los costos relativos de trabajo y de la politica de ingresos. El metodo del equivalente de certeza requiere que el aumento de los salarios sea restringido, mientras que el de aversion al riesgo involucra una politica de ingresos acomodaticia.

Work-Related Accidents and the Production Process

The extent to which the incidence of work-related accidents can be considered a phenomenon responsive to economic incentives is examined in this paper. A joint output, multi-input translog production model is developed in which the relationship between wage costs and risk is estimated along with the technological parameters of the production process. Estimates for six manufacturing industries show a statistically significant opportunity cost of reductions in injuries and a statistically significant relationship between wage costs and injury risk. The results also provide some evidence that labor markets sort the most risk-averse workers to the safer industries. Simulations based on production technology indicate that relatively large taxes are needed to induce reductions in the incidence of injuries.

Total Price Uncertainty and the Theory of the Competitive Firm

In the past ten years our understanding of the behaviour of the firm under uncertainty has developed rapidly.1 This has been due to research in two broad areas: the sources of uncertainty in the firm's operations, and the pricing of that uncertainty by the firm's stockholders. In the first area, Baron (1968), Sandmo (1971), Leland (1972), and Batra and Ullah (1974) have all examined the impact of price uncertainty; Blair (1974), Holthausen (1976) and Hartman (1976), the impact of factor cost uncertainty; and Hartman (1972), Turnovsky (1973) and Epstein (1978) the extent to which technological flexibility affects the impact of price and cost uncertainty. These original contributions have invariably assumed that the objective of the firm is to maximize a shareholder's expected utility function. This approach implicitly assumes that the price of risk is affected by the firm's decision and thus that the firm is a monopolist in the financial market that allocates risk. Concurrent with this literature has been the development of theories of market valuation under uncertainty. Arrow (1971), Debreu (1959) and Hirshleifer (1970) have developed the time-state preference model (TSP), and Sharpe (1964) and Lintner (1965) the capital asset pricing model (CAP), to provide a specification of the firm's market value under uncertainty. Hence, if the equilibrium assumptions of either model hold, the managers of the firm can maximize shareholder utility by maximizing an objective market value of the firm. Then, as Hite (1978) and Nielsen (1975) have shown, the theory of the firm under uncertainty is formally identical to the theory of the firm under certainty. The only difference is that the value is replaced by the certainty equivalent value, determined from the equilibrium valuation equation. Unfortunately, it is not realistic to assume that markets are either complete or perfect. The most obvious incompleteness is the lack of full commodity markets. Some commodity markets do exist; however, the firm cannot remove technology or wage risk. The result is that stock markets exist to allocate residual income risk, whereas in a complete market all of the components of that risk would have their own commodity market, thus making the stock 2 market redundant. Hence, this paper will consider the joint interaction of total price uncertainty, that is, product price and factor cost uncertainty, in a model where there is only a stock market to allocate residual income risk. Moreover, we will allow the completeness of this residual income market to vary to examine its impact on the firm's operating decisions. This paper can therefore be considered a synthesis and generalization of previous work in this area.

WAGE DIFFERENTIALS AND RISK OF DEATH: AN EMPIRICAL ANALYSIS

Economic InquiryVolume 21, Issue 2 p. 271-280 WAGE DIFFERENTIALS AND RISK OF DEATH: AN EMPIRICAL ANALYSIS STUART A. LOW, STUART A. LOWSearch for more papers by this authorLEE R. McPHETERS, LEE R. McPHETERS *Arizona State University. The authors wish to acknowledge the helpful research assistance of Douglas Rounds. We also wish to thank Dennis Hoffman, Tim Hannan, an anonymous referee, Steve Easton, and John Chant for their valuable comments which clarified our presentation.Search for more papers by this author STUART A. LOW, STUART A. LOWSearch for more papers by this authorLEE R. McPHETERS, LEE R. McPHETERS *Arizona State University. The authors wish to acknowledge the helpful research assistance of Douglas Rounds. We also wish to thank Dennis Hoffman, Tim Hannan, an anonymous referee, Steve Easton, and John Chant for their valuable comments which clarified our presentation.Search for more papers by this author First published: April 1983 https://doi.org/10.1111/j.1465-7295.1983.tb00631.xCitations: 18 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume21, Issue2April 1983Pages 271-280 RelatedInformation

The Risk Element in Occupational and Educational Choices

The study contains estimates of the coefficients of variation of income of scientists by age, level of education, and type of employment. The source of data is the 1966 National Register of Scientific and Technical Personnel. The analysis shows that the coefficient of variation tends to decrease as the level of education increases, and to be higher in private industry than in government or educational institutions. Incomes of scientists are found to be lognormally distributed. Estimates of the rate of return to education, which take into account risk differentials, are derived.