Earnings risk in the presence of firm shocks and long term contracts

Author: Thibaut Lamadon, And
Dnr: 123/2014

Understanding the sources of earnings uncertainty faced by workers in the labor market is fundamental to the design of insurance policies that intend to reduce uncertainty and inequality in the economy. An important body of research has looked at the ability of individuals to insure themselves against earnings shocks and another important body of literature has looked at measuring the statistical properties of the income process. Finally new recent research has studied empirically how much of earnings uncertainty can be attributed to firm specific shocks.

In this project I propose to develop and estimate an equilibrium model with a theory of shocks transmission. The environment allows for shocks to both workers and firms productivity and a very flexible contracting space where firms can choose how much insurance to provide to their workers. Additionally, workers mobility is constrained by search frictions to generate involuntary unemployment. The model is flexible and allows for the study of labor policies such as minimum wage, non linear taxation, unemployment benefits and severance payments.

To quantify the multiple sources of risk and their pass-through to wages, the model would ideally be estimated using matched employer-employee data. This would require information about the employers such as value added and the amount of borrowing, as well as information about workers. To complete this project we would ideally have access to the Louise dataset, the ESFTG and FTGAST datasets. The estimation relies on information among co-workers and it is important to keep the workplace ID. If possible, access to the yearly survey about hours and occupation would allow us to go one step further and separate changes in wages from changes in hours.