How Important is Precautionary Labor Supply?
37 Pages Posted: 8 Jul 2016
Date Written: June 2016
We quantify the importance of precautionary labor supply using data from the German Socio-Economic Panel (SOEP) for 2001-2012. We estimate dynamic labor supply equations augmented with a measure of wage risk. Our results show that married men choose about 2.5% of their hours of work or one week per year on average to shield against unpredictable wage shocks. This implies that about 26% of precautionary savings are due to precautionary labor supply. If self-employed faced the same wage risk as the median civil servant, their hours of work would reduce by 4%.
Keywords: Wage Risk, Labor Supply, Precautionary Saving, Life Cycle, Dynamic Panel Data
JEL Classification: D91, J22, C23
Suggested Citation: Suggested Citation