DP2043 What Determines Earnings and Employment Risk

Author(s): Luigi Guiso, Tullio Jappelli, Luigi Pistaferri
Publication Date: December 1998
Keyword(s): income risk, Subjective Expectations, Unemployment
JEL(s): E21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2043

Expectations and riskiness of future earnings are crucial determinants of individuals' intertemporal choices. Yet, the empirical literature lacks reliable measures of the distribution of future income. Lacking direct observability, the latter is usually estimated inferring the mean, the variance and other moments of the distribution from income realizations on panel data. In this paper we rely instead on subjective expectations available in the 1995 Survey of Household Income and Wealth, a large random sample representative of Italian households. The survey elicits information on the distribution of future earnings and the probability of employment in a very simple and parsimonious way. Based on the responses, we estimate the individual distributions of expected earnings conditional on working as well as unconditional. We can then relate various moments of these distributions to demographic and economic variables observable in the cross-section.