Risk aversion, earnings uncertainty and labour supply
Traditionally, the models used by researchers to examine the impact of work incentives, or job search behaviour, consider job characteristics other than the wage irrelevant. And yet factors such as job security and the predictability of earnings may influence labour supply behaviour.
Psychological research shows that the majority of people try to avoid risk and uncertainty, and for risk-averse individuals, one side effect of employment and earnings instability may be to reduce the desirability of paid work in comparison to receiving out-of-work benefits.
This project will provide evidence on the impact of earnings instability and uncertainty on labour supply. It will use a combination of quantitative analysis of panel data and laboratory experiments to shed light on whether:
- Earnings uncertainty is linked with the probability of leaving unemployment in the general population, and whether this link is stronger for more risk averse individuals.
- A causal link between earnings uncertainty and the likelihood of taking up paid work can be established using experimental methods.
- Policy interventions such as benefit sanctions and/or a reduction of benefit application costs can alter the influence of earnings uncertainty on labour supply.
The findings will be relevant for employment policy, as well as the design and implementation of out-of-work benefits.
The Nuffield Foundation is an independent charitable trust with a mission to advance social well-being. It funds research that informs social policy, primarily in Education, Welfare, and Justice. It also funds student programmes that provide opportunities for young people to develop skills in quantitative and qualitative methods. The Nuffield Foundation is the founder and co-funder of the Nuffield Council on Bioethics and the Ada Lovelace Institute. The Foundation has funded this project, but the views expressed are those of the authors and not necessarily the Foundation. Visit www.nuffieldfoundation.org
Research Fellow - ISER - University of Essex