Labor Market Uncertainty and Portfolio Choice Puzzles
- (pp. 222-62)
Abstract
The standard life-cycle models of household portfolio choice have difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent, labor market uncertainty into an otherwise standard model. A great uncertainty in the labor market—high unemployment risk, frequent job turnovers, and an unknown career path—prevents young workers from taking too much risk in the financial market. As labor market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.Citation
Chang, Yongsung, Jay H. Hong, and Marios Karabarbounis. 2018. "Labor Market Uncertainty and Portfolio Choice Puzzles." American Economic Journal: Macroeconomics, 10 (2): 222-62. DOI: 10.1257/mac.20160207Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G11 Portfolio Choice; Investment Decisions
- J31 Wage Level and Structure; Wage Differentials
- J63 Labor Turnover; Vacancies; Layoffs
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