Cross-Sectional Earnings Risk and Occupational Sorting: The Role of Risk Attitudes

34 Pages Posted: 27 Jan 2006

See all articles by Holger Bonin

Holger Bonin

IZA Institute of Labor Economics; ZEW – Leibniz Centre for European Economic Research

Thomas J. Dohmen

Institute for the Study of Labor (IZA); Maastricht University - Business Investment Research Center (BIRC)

Armin Falk

briq - Institute on Behavior & Inequality

David Huffman

IZA Institute of Labor Economics; Swarthmore College

Uwe Sunde

Ludwig Maximilian University of Munich (LMU)

Date Written: January 2006

Abstract

This paper investigates whether risk preferences explain how individuals are sorted into occupations with different earnings variability. We exploit data from the German Socio-Economic Panel, which contains a subjective assessment of willingness to take risks whose behavioral relevance has been validated in previous work. As a measure of earnings risk, we use the cross-sectional variation in earnings that is left unexplained by human capital in Mincerian wage regressions. By relating earnings risk to the measure of individual risk preference, our evidence shows that individuals with low willingness to take risks are more likely to be sorted into occupations with low earnings risk. This pattern is found regardless of the level of occupation categories, region, gender and labor market experience. We also find that risk preferences are significant determinant of wages in a Mincer regression, illustrating the importance of preferences and attitudes in addition to more standard regressors.

Keywords: occupational choice, sorting, risk preferences, GSOEP, earnings risk

JEL Classification: J24, J31, D01, D81

Suggested Citation

Bonin, Holger and Dohmen, Thomas and Falk, Armin and Huffman, David and Sunde, Uwe, Cross-Sectional Earnings Risk and Occupational Sorting: The Role of Risk Attitudes (January 2006). IZA Discussion Paper No. 1930. Available at SSRN: https://ssrn.com/abstract=878662

Holger Bonin (Contact Author)

IZA Institute of Labor Economics ( email )

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ZEW – Leibniz Centre for European Economic Research

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Thomas Dohmen

Institute for the Study of Labor (IZA) ( email )

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

Maastricht University - Business Investment Research Center (BIRC) ( email )

P.O. Box 616
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Netherlands
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Armin Falk

briq - Institute on Behavior & Inequality

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Germany

HOME PAGE: http://www.briq-institute.org/

David Huffman

IZA Institute of Labor Economics ( email )

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

Swarthmore College

500 College Ave
Swarthmore, PA 19081
United States

Uwe Sunde

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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