SFB 649 I-II: Labor Market Risks: Human Capital, Compensation, and Unemployment (TP C 7)

Participation in the labor market is a central activity for virtually all economic agents. The sacrifice of leisure time by individuals in work and the investment of this time in education and search are essential for the gainful employment of labor and thus the generation of value added in modern market economies. These activities are exposed to fundamental risks which cannot always be diversified away. Textbook theories of labor economics seldom treat the participation, human capital investment and search decisions with explicit regard to such risks. The risk of unemployment, for example, certainly affects the valuation of human capital investments and will determine whether investment is made in general or specific form. Labor market rules and institutions may also play a role for both the extent and type of human capital investments made. Moreover, the nature of uncertainty regarding future labor market states can affect current decisions taken by labor market participants. In general equilibrium, decisions by labor market participants will also influence macroeconomic uncertainty and outcomes in general. Risk aversion and incompleteness of capital markets will accentuate these feedbacks, although the welfare costs of such imperfections is not well-understood. In this sub-project, the role of prospective labor force state risk - in particular, the risk of unemployment - for human capital investment and earnings will be investigated. The feedback of these decisions on the aggregate economy will also be investigated. The project will begin with a theoretical study and conclude with an empirical investigation of these linkages, using both micro and macro data.