Research Paper University of Leicester: Department of Economics Discussion Papers 02/14
Wage growth, human capital and risk preference: evidence from the British Household Panel Survey
The aim of this paper is to explore how interpersonal variation in risk preference affects human capital investment and, hence, wage growth. To date, there has been a distinct lack of empirical research in this area despite the fact that the risk preference of individuals plays a key role in the theoretical models of human capital accumulation. We investigate the link between risk preference, human capital investment and wage growth using data from four waves of the British Household Panel Survey using a measure of the extent of risky financial assets held by individuals as a proxy for risk preference. We exploit panel data enabling us to determine the change in real wages experienced by individuals across three different time horizons, 1995-96, 1995-98 and 1995-2000. Our empirical specification is derived from a theoretical framework, which explicitly allows the risk preferences of individuals to influence human capital accumulation and, consequently, wage growth. Our findings suggest that risk-loving behaviour impacts positively on the returns to human capital investment thereby enhancing wage growth.