American Economic Review Vol. 100 No. 4 2010

Wage Risk and Employment Risk over the Life Cycle

Hamish Low¹; Costas Meghir²; Luigi Pistaferri³

¹ Faculty of Economics, Sidgwick Avenue, Cambridge, CB3 9DD, UK and the Institute for Fiscal Studies. · ² Department of Economics, University College London, Gower Street, London WC1E 6BT, UK, the Institute for Fiscal Studies, Yale University, and IZA. · ³ Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305-6072, USA, SIEPR, and National Bureau of Economic Research.

Abstract

We specify a life-cycle model of consumption, labor supply and job mobility in an economy with search frictions. We distinguish different sources of risk, including shocks to productivity, job arrival, and job destruction. Allowing for job mobility has a large effect on the estimate of productivity risk. Increases in the latter impose a considerable welfare loss. Increases in employment risk have large effects on output and, primarily through this channel, affect welfare. The welfare value of programs such as Food Stamps, partially insuring productivity risk, is greater than the value of unemployment insurance which provides (partial) insurance against employment risk.

DOI

10.1257/aer.100.4.1432

Volume

100

Issue

4

Pages

1432-1467

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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