Changing labor markets in unequal societies: Challenges from heterogeneity in labor market risk
Economic Theory
Final Report Abstract
Labor markets are constantly changing. Drastic policy reforms such as the Hartz reforms in Germany, technological change through digitalization and automation in all industrialized countries and increasing global competition from China and others have raised concerns that changes in labor markets have even accelerated, so that today's workers face higher labor market risks, less job security, and high levels of inequality. This project empirically documents different dimensions of heterogeneity in labor market risks and examines their consequences for life-cycle wealth accumulation, the design of public pension systems, and the portfolio composition of households. In the first work package of the project, I and my co-authors use U.S. data to show that workers with more unstable careers have lower earnings growth and accumulate less wealth over their working lives, even after controlling for differences in earnings. Using a newly developed model to account for these empirical facts, we show that the weaker life-cycle savings motive due to lower earnings growth is the main driver of lower wealth accumulation. We find that quantitatively effects of higher labor market risk cancel out on average. The second work package builds on this newly developed framework and explores the implications for the optimal design of the pension system. Heterogeneity in job stability leads to different realizations of lifetime earnings risk, which can be most efficiently redistributed at the end of the career when lifetime risk has been realized. Heterogeneity in job stability suggests that the pension system should be more progressive, but incentive effects on human capital accumulation counteract this effect, making the optimal design a quantitative question. In a calibrated version of the newly developed model, the optimal pension system is found to be more progressive than the current US system. The third work package provides new evidence on the concentration of unemployment risk using social security data from the German labor market. The high quality of the data and their long panel dimension allows the estimation of individual-level risk processes. Using these individual-level estimates, my co-authors and I study the implications for portfolio choice. We show empirically and theoretically that low-risk, high-growth individuals accumulate more wealth and that portfolio differences increase wealth inequality relative to income inequality because low-risk individuals invest more in illiquid, high-return assets.
Publications
-
Employment stability, earnings dynamics, and life-cycle savings, working paper University of Mannheim
Moritz Kuhn, Leanne Nam & Gasper Ploj
-
Optimal Progressive Pension Systems and Heterogeneous Labor Market Risk, working paper University of Bonn
Leanne Nam
-
The simple life? Heterogeneity in income risk and household portfolios, working paper University of Mannheim
Christian Bayer, Sebastian Hildebrand, Thomas Hintermaier, Moritz Kuhn & Gasper Ploj
