Wage Volatility and Changing Patterns of Labor Supply
Over the past few decades, the skilled-unskilled hours differential for US
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 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 while 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.
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