St. Louis Fed, Report: Subjective Earnings Risk

“We introduce a survey instrument that measures earnings risk. A key feature of our instrument is that it conditions on possible job transitions, i.e., whether people stay in their current job, quit or are laid off. A link with administrative data provides many credibility checks. It also reveals subjective earnings risk to be significantly lower than its administratively-estimated counterpart, since expected earnings growth is heterogeneous even within narrow demographic and earnings cells. We also show possible job transitions to be central determinants of subjective earnings risk. We calibrate a life-cycle model of search and matching in the standard manner based on administrative data. We show that the calibrated model produces far higher estimates of individual earnings risk than do our subjective expectations whether or not workers switch jobs. Our results highlight the value of using survey-based measures of subjective earnings risk in modeling labor market transitions and other key choices impacted by earnings risk, such as savings and portfolio decisions.”