Journal Article

Wage Risk and Employment Risk over the Life Cycle

Date: 01 September 2010
Publisher: The American Economic Association
ISSN: 0002-8282
Published in: American Economic Review , Vol. 100, No. 4, pp 1432-1467

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.