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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:

  1. 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.
  2. A causal link between earnings uncertainty and the likelihood of taking up paid work can be established using experimental methods.
  3. 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.

Project website

http://www.nuffieldfoundation.org/risk-aversion-earnings-uncertainty-and-labour-supply

Team members

Dr Silvia Avram

Research Fellow - ISER - University of Essex


London commuters credit keith ellwood

Photo credit: Keith Ellwood