Wage Risk, Employment Risk and the Rise in Wage Inequality

A New Measure of Wage Risk: Occupation-Specific Evidence for Germany

“…In this vein, using a 20-year longitudinal sample of US workers from the Survey of Income and Program Participation, Mecikovsky and Wellschmied (2016) provide an interesting perspective on the decomposition of time trends in wage uncertainty of male individuals, aged between 25 and 61. Distinguishing three subperiods, the contribution of the permanent component to wage risk is relatively small throughout.…”

“…With regard to the question of how to measure wage risk (or wage uncertainty), the literature can be divided into two main branches. A first branch proceeds from a structured representation of (log) wages that allows to identify their permanent and transitory components (e.g., Abowd et al, 1999;Baker & Solon, 2003;Low et al, 2010;Mecikovsky & Wellschmied, 2016). Wage risk is measured then as the variance of the transitory wage component.…”

“…Specifically, wage risk is approximated as the (probit model implied) probability to realize wage earnings below a certain lower quantile of the occupation-and time-specific distribution of hourly wages. 1 Unlike the aforementioned measures (Abowd et al, 1999;Baker & Solon, 2003;Low et al, 2010;Mecikovsky & Wellschmied, 2016;Hospido, 2012;Parker et al, 2005;Jessen et al, 2018), our metric has the advantage to avoid strong structural or homogeneity assumptions, allowing identification of wage risks at the individual level. Moreover, our measure of wage risk builds upon probit models that are commonly used to explain labor market outcomes.…”

“…Some studies extend this basic framework by considering further stochastic components in modelling the wage process. For instance,Mecikovsky and Wellschmied (2016) include a further stochastic source of wage variation which captures the arrival of outside job offers from a wage offer distribution, i.e., earning opportunities after potential job change Abowd et al (1999). include worker-and firm-specific components in their structural log wage model.…”