Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/214230
Authors: 
Jessen, Robin
König, Johannes
Year of Publication: 
2020
Series/Report no.: 
DIW Discussion Papers No. 1845
Abstract: 
We decompose permanent earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks we formulate a life-cycle model of consumption and labor supply. Both permanent wage and hours shocks are important to explain earnings risk, but wage shocks have greater relevance. Progressive taxation strongly attenuates cross-sectional earnings risk, its life-cycle insurance impact is much smaller. At the mean, a positive hours shock of one standard deviation raises life-time income by 10%, while a similar wage shock raises it by 12%.
Subjects: 
Earnings Risk
Wage Risk
Labor Supply
Progressive Taxation
Consumption Insurance
JEL: 
D31
J22
J31
Document Type: 
Working Paper

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