Welfare consequences of rising wage risk in the United States: Self-selection into risky jobs and family labor supply adjustments

Abstract

Wages in the United States have become more volatile since the early 1970s. This paper quantitatively demonstrates that the welfare cost caused by this change is substantially overstated when heterogeneity in individual risk preferences and workers'risk choices are neglected. Family labor supply adjustments reduce the welfare cost and do so most effectively when borrowing and saving behavior is allowed. It is also found that wives increase their labor supply signi ficantly in response to increases in the variance of husbands' permanent wage shocks, and this `added-worker' effect is mostly accounted for by wives' labor supply adjustments on the extensive margin.