Hours Risk and Wage Risk: Repercussions over the Life-Cycle

We decompose earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks we formulate a life-cycle model of consumption and labor supply. For estimation we use data on married American men from the PSID. Permanent wage shocks explain 31% of total risk, permanent hours shocks 21%. Progressive taxation attenuates cross-sectional earnings risk, but its life-cycle insurance impact is much smaller. At the mean, a one standard deviation hours shock raises life-time income by 11%, a wage shock by 13%.