Do Wages Really Compensate for Risk Aversion and Skewness Affection?

40 Pages Posted: 15 Feb 2002

See all articles by Joop Hartog

Joop Hartog

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Wim P.M. Vijverberg

CUNY The Graduate Center - Department of Economics; IZA Institute of Labor Economics

Date Written: February 2002

Abstract

Utility theory suggests that foreseeable risk should increase the compensation for work. This paper expands on this notion: on basis of utility theory, people should care not only about risk but also about the skewness in the distribution of the compensation paid. In particular, because the degree of risk aversion ought to decrease with income, people should appreciate a small chance of a substantial gain; they should exhibit an "affection" for skewness. To test these hypotheses, this paper carefully develops various measures of risk and skewness by occupational/educational classification of the worker and finds supportive evidence: wages rise with occupational earnings variance and decrease with skewness. In order to identify the discount rate and the degree of risk aversion, we also apply structural modelling of education and occupational choice and allow for non-lognormal wage distributions.

Keywords: Wage Variability, Wage Risk Compensation

JEL Classification: D8, J3

Suggested Citation

Hartog, Joop and Vijverberg, Wim, Do Wages Really Compensate for Risk Aversion and Skewness Affection? (February 2002). IZA Discussion Paper No. 426. Available at SSRN: https://ssrn.com/abstract=300642

Joop Hartog (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Wim Vijverberg

CUNY The Graduate Center - Department of Economics ( email )

365 Fifth Avenue, 5th Floor
New York, NY 10016
United States
212-817-8262 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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