Wage Volatility and Changing Patterns of Labor Supply

Abstract

Over the past few decades, the skilled-unskilled hours differential for U.S. men increased when the skill premium rose sharply, in contrast with dominant income effects. Based on PSID data, we show that over the 1967-2000 period, skilled men experienced a three times larger increase in wage volatility than unskilled men. With the rise in wage volatility, our general equilibrium incomplete markets model generates a 2.7 hours increase in the hours differential whereas it increased by 1.4 hours in the data. We find that hours adjustments are important for self-insurance in the short run, whereas precautionary savings play a crucial role eventually.

Wage Risk and the Skill Premium

“…This paper is also related to a large incomplete markets literature in the Bewley (1986), Imrohoroglu (1989), Huggett (1993) and Aiyagari (1994) tradition. The two papers that are most closely related to ours in this literature are Heathcote, Storesletten, and Violante (2010) and Hong, Seok, and You (2017). Heathcote, Storesletten, and Violante (2010) The rest of this paper is structured as follows.…”

“…Hong, Seok, and You (2017) use the Panel Study of Income Dynamics data from 1967 to 2010 and estimate the parameters of these processes for each skill group separately.FollowingHeathcote, Storesletten, and Violante (2010), they assume that the persistence parameters ξ i and the variances of the initial draws of the persistent components σ i,θ are constant over time. The variances of the shocks of the persistent components σ i,κ and the variance of the shocks of the transitory components σ i,ε are assumed to change over timeand Hong, Seok, and You (2017) estimate them for all years in the PSID sample. 9 The estimated variances are very volatile across years.…”

“…Benchmark Parameters for 1967This table reports the benchmark parameters taken directly from the literature or the data. The acronyms GHK, HSV, HSY, and KORV stand forGreenwood, Hercowitz, and Krusell (1997),Heathcote, Storesletten, and Violante (2017),Hong, Seok, and You (2017), andKrusell, Ohanian, Ríos-Rull, and Violante (2000), respectively. CPS and NIPA stand for Current Population Survey and National Income and Product Accounts, respectively.…”

“…Changes in Wage Risk Between 1967 and 2010 Variance of the transitory shock 0.0116 0.0673 Variance of the persistent shock 0.0037 0.0304 Unskilled agents Variance of the transitory shock 0.0177 0.0627 Variance of the persistent shock 0.0052 0.0157 This table reports the variances of the transitory and persistent components of the stochastic wage processes for 1967 and 2010. The values reported in this table are fromHong, Seok, and You (2017).…”

How does finance influence labour market outcomes?

“…Rising wage volatility trends may reflect a number of influences such as increasing employer flexibility regarding labour management practices, declining unionisation and the growth of performance contracts. These can contribute to productivity growth but may also reduce the income security of workers, who may respond by increasing their precautionary savings and adjusting hours worked (Hong et al, 2015).…”