Labor and Financial Market Interactions: The Case of Labor Income Risk and Car Insurance in the UK 1969-95

Abstract

Microeconomic theory predicts that under certain regularity conditions higher idiosyncratic risk increases the propensity to insure against independent marketable risks. We apply these predictions to the specific case of labor income risk and car insurance using data from the UK. The main empirical results are: - higher labor income risk induces a higher demand for car insurance. - the effects of increases in labor income risk after 1979 seem to be more than offset by a more liberal financial market. - the effects seem to be important on the macro level in the 70s whereas they become negligible in the 80s and 90s.

Keywords: precautionary motive, Labor income risk, insurance, imperfect markets, United Kingdom

JEL Classification: D12, D81, G22, J31