Wage Risk and the Skill Premium

Ctirad  Slavik; Hakki Yazici

doi:10.1093/ej/ueac015

Wage Risk and the Skill Premium

Ctirad Slavik, Hakki Yazici^*

^*Corresponding author for this work

School of Economics

Research output: Contribution to journal › Article (Academic Journal) › peer-review

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Abstract

The skill premium has increased significantly in the United States in the last five decades. During the same period, individual wage risk has also increased. This paper proposes a mechanism through which a rise in wage risk increases the skill premium. Intuitively, a rise in uninsured wage risk increases precautionary savings, thereby boosting capital accumulation, which increases the skill premium due to capital-skill complementarity. Using a quantitative macroeconomic model, we find that the rise in wage risk observed between 1967 and 2010 increases the skill premium significantly. This finding is robust across a variety of model specifications.

Original language	English
Pages (from-to)	2207-2230
Number of pages	24
Journal	Economic Journal
Volume	132
Issue number	646
Early online date	8 Feb 2022
DOIs	https://doi.org/10.1093/ej/ueac015
Publication status	Published - 1 Aug 2022

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AB - The skill premium has increased significantly in the United States in the last five decades. During the same period, individual wage risk has also increased. This paper proposes a mechanism through which a rise in wage risk increases the skill premium. Intuitively, a rise in uninsured wage risk increases precautionary savings, thereby boosting capital accumulation, which increases the skill premium due to capital-skill complementarity. Using a quantitative macroeconomic model, we find that the rise in wage risk observed between 1967 and 2010 increases the skill premium significantly. This finding is robust across a variety of model specifications.

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JO - Economic Journal

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Wage Risk and the Skill Premium

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