Risk aversion and job mobility

https://doi.org/10.1016/j.jebo.2019.01.021Get rights and content

Highlights

  • The study examines the relation between risk aversion and job mobility.

  • Risk preferences are elicited through (incentivized) experiments.

  • The results show that more risk averse workers are less likely to move to other jobs.

  • The relation between risk aversion and job mobility appears not to be driven by search effort.

Abstract

Job mobility is inherently risky as workers have limited ex ante information about the quality of outside jobs. Using a large longitudinal Dutch dataset, which includes data on risk preferences elicited through an (incentivized) lottery-choice experiment, we examine the relation between risk aversion and job mobility. The evidence shows that risk averse workers are less likely to move to other jobs. The results are stronger for male workers and for workers who hold a permanent contract. Our empirical findings indicate that the negative relation between risk aversion and job mobility is driven by the job acceptance rather than the search effort decision.

Introduction

Although most decisions involve risk, this is particularly true in the labor market. This study focuses on a risky decision that is relevant to almost all workers and that may have major consequences for the individual’s career path: the decision to quit and move to another job. According to canonical models on job mobility, uncertainty plays a crucial role in explaining mobility processes: there is uncertainty about whether the worker will be able to find a better job (Burdett, 1978, Mortensen, 1986) and about the quality of outside jobs (Jovanovic, 1979). Because workers have limited information about many aspects of the new job, they may realize that they ended up in a poor match after accepting an outside job offer. The premise that job mobility is risky is also consistent with the empirical literature, showing that job mobility can be an important source of wage growth (le Grand, Tåhlin, 2002, Schmelzer, 2012, Topel, Ward, 1992), but may also lead to wage losses or lower wage growth (Borjas, 1981, Light, McGarry, 1998, Tjaden, Wellschmied, 2014). Because job mobility is inherently risky, it can be expected that risk preferences affect the decision to move to another job.

This paper examines the relation between risk aversion and job mobility. Given that uncertainty plays a central role in canonical models for the analysis of turnover, it is surprising that the role of risk aversion in turnover decisions has been largely ignored in the labor economics literature. Existing theoretical models generally assume risk neutral individuals or homogeneous risk preferences. Allowing for heterogeneity in risk preferences, we demonstrate theoretically that risk aversion is negatively related to job mobility. There are two potential channels through which job mobility is affected by risk aversion: the job acceptance channel and the job search channel. First, given the uncertainty associated with outside jobs, risk averse workers are more critical about outside job offers. Hence, conditional on receiving an offer risk averse workers are more likely to decline an offer. Second, due to the higher probability of rejecting outside offers, the marginal gains from search are lower for risk averse workers and they will therefore search less intensively. Moreover, risk averse workers will invest less in search because this is a risky investment activity involving short-run costs and uncertain benefits.

We examine the relation between risk aversion and job mobility using the LISS, a longitudinal panel from the Netherlands. Given the longitudinal nature of the data we are able to follow individual labor market trajectories over time, which allows us to analyze job mobility behavior. Moreover, as the data contains information about (on-the-)job search behavior, we are able to test one of the channels through which risk aversion is related job mobility. A unique feature of the data is that in addition to information on labor market behavior and a wide range of background characteristics, the LISS panel includes various measures of risk preferences. We exploit a measure of risk aversion that is elicited through an (incentivized) lottery-choice experiment as well as several survey questions on the respondent’s willingness to take risks.

The evidence indicates that workers who are more risk averse are less likely to be mobile on the labor market. This finding appears not to be crucially dependent on the risk aversion measure: both the results based on the lottery-choice experiment data and the results based on the survey questions on risk aversion point out a negative relation between risk aversion and job mobility. Overall, this relation appears to be stronger for men and when job mobility involves more uncertainties. The evidence from the lottery-choice experiment does not indicate that risk aversion decreases on-the-job search effort, which suggests that the negative relation between risk aversion and job mobility is driven by the job acceptance decision: risk averse workers are more likely to reject outside offers. Surprisingly, some of the estimation results show that more risk averse workers search more intensively on-the-job. An explanation for this finding is that on-the-job search is not only used to generate outside job offers (as assumed in on-the-job search models), but also to obtain more information about the quality of potential job offers and the individual’s labor market position. Search may thereby decrease uncertainties involved in job mobility.

Our study contributes to a growing literature testing the effects of risk aversion on labor market outcomes. Existing studies have examined how risk aversion is related to educational and occupational choice (Bonin, Dohmen, Falk, Huffman, Sunde, 2007, Falco, 2014, Fouarge, Kriechel, Dohmen, 2014), migration decisions (Bauernschuster, Falck, Heblich, Suedekum, Lameli, 2014, Dustmann, Fasani, Meng, Minale, 2017, Goldbach, Schlüter, 2018, Heitmueller, 2005, Jaeger, Dohmen, Falk, Huffman, Sunde, Bonin, 2010), reservation wages of unemployed job seekers (Feinberg, 1977, Pannenberg, 2010), wage growth (Budria, Diaz-Serrano, Ferrer-i Carbonell, Hartog, 2013, Shaw, 1996) and the decision to become (and remain) an entrepreneur (Caliendo, Fossen, Kritikos, 2010, Caliendo, Fossen, Kritikos, 2009, Koudstaal, Sloof, Van Praag, 2015, Skriabikova, Dohmen, Kriechel, 2014).1 Empirical evidence on the relation between risk aversion and job mobility is virtually non-existent. To our knowledge, Maier et al. (2016) is the only other study that tests the relation between risk attitudes and job mobility empirically.2 Using the German Socio-Economic Panel Survey, Maier et al. (2016) find that more risk-tolerant individuals move more often from one job to another. However, they rely on a survey question on risk attitudes rather than experimental data to capture heterogeneity in risk aversion and do not test the relation between risk aversion and on-the-job search effort. In general, most studies on the relation between risk aversion and labor market behavior rely on survey-based questions on risk attitudes to capture variation in risk preferences (Koudstaal et al. (2015) and Goldbach and Schlüter (2018) are exceptions). In addition to examining the predictive value of risk aversion in a new domain, one of the strengths of our approach is that we use an experimentally elicited measure of risk aversion for a relatively large sample of field subjects.

Furthermore, this study contributes to the literature on turnover and labor market dynamics by providing new insights in the determinants of turnover. Turnover is a relevant economic variable, as it affects wages and careers (Blau, DeVaro, 2007, Dustmann, Pereira, 2008, Topel, Ward, 1992): the results may therefore provide a new explanation for wage inequality. Given the evidence indicating a significant intergenerational correlation of risk attitudes (Dohmen et al., 2012), the study sheds light on a new mechanism explaining (low levels of) intergenerational income mobility. In addition, turnover has an impact on firm productivity (Ilmakunnas, Maliranta, Vainiomäki, 2005, Jackson, 2013, Siebert, Zubanov, 2009) and is relevant for the (allocative) efficiency of the labor market (Mortensen, 2011). The paper demonstrates that heterogeneity in preferences are important, and that (policy) evaluations assuming risk neutrality or a single risk aversion parameter (representative agent models) produce incomplete results.

The paper is structured as follows. The next section discusses the theoretical mechanisms through which risk aversion affects job mobility. Next, the data is discussed and the empirical results are presented. The final section concludes.

Section snippets

Theoretical models on job mobility

The benchmark theoretical models of turnover in economics are based on imperfect information. Borjas and Goldberg (1978) already pointed out the relevance of uncertainty in the job mobility process: “it is likely that uncertainty both before and after search about firms and workers and the on-the-job learning process which reduces this uncertainty is an important characteristic of the labor market” (Borjas and Goldberg, 1978, p. 124). In the current theoretical literature, we can distinguish

Data and methodology

To test the relation between risk aversion and job mobility empirically, we make use of the LISS (Longitudinal Internet Studies for the Social sciences) survey, a representative Dutch panel that is in operation since 2007 and includes around 4500 households (around 7000 individuals). LISS contains several studies, including the ‘Work and Schooling’ core study that includes questions on labor market outcomes and behavior. Because LISS participants receive reimbursement for completing the survey,

Main results

The main findings using data from the lottery-choice experiment are presented in Table 3. The estimation results for the pooled sample (Panel A) show that there is a negative and significant relation between risk aversion and the probability to move to another job.16 One additional safe choice in the lottery-choice experiment is associated with an increase in the

Conclusion and discussion

This paper examines the relation between risk aversion and job mobility. Workers have little ex ante information about outside job offers and therefore quitting their current job and moving to a new one is a risky decision. Moreover, searching for another job involves costs and uncertain rewards and may therefore be considered as a risky investment activity. Theoretically, we therefore expect that risk averse workers shy away from search activities, are more critical about potential outside

Acknowledgements

In this paper we make use of data of the LISS (Longitudinal Internet Studies for the Social sciences) panel administered by CentERdata (Tilburg University, The Netherlands). We would like to extend thanks to two anonymous referees, Yusuf Emre Akgündüz, Janneke Plantenga, Benedikt Vogt, Bastian Westbrock and participants of the Dutch Economists Day, the EALE annual conference and the SOLE annual conference for helpful comments on prior drafts.

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