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

38 Pages Posted: 28 Feb 2020

See all articles by Robin Jessen

Robin Jessen

Free University of Berlin (FUB)

Johannes Koenig

German Institute for Economic Research (DIW Berlin)

Date Written: January 1, 2020

Abstract

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%.

Keywords: Earnings Risk, Wage Risk, Labor Supply, Progressive Taxation, Consumption Insurance

JEL Classification: D31, J22, J31

Suggested Citation

Jessen, Robin and Koenig, Johannes, Hours Risk and Wage Risk: Repercussions over the Life-Cycle (January 1, 2020). DIW Berlin Discussion Paper No. 1845 (2020), Available at SSRN: https://ssrn.com/abstract=3544728 or http://dx.doi.org/10.2139/ssrn.3544728

Robin Jessen

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

Johannes Koenig (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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