I am grateful to Tore Ellingsen, Paul Klein, Lars Ljungqvist, Torsten Persson, Kjetil Storesletten, Lars E.O. Svensson and anonymous referees for helpful discussions and comments. I thank the Wallander and Hedelius Foundation and the Bank of Sweden Tercentenary Foundation for generous funding. This article previously circulated under the title ‘Labor Supply and Consumption under Uncertainty: Prudence Reconsidered’.
Labour Supply and Saving Under Uncertainty*
Article first published online: 11 JUL 2006
The Economic Journal
Volume 116, Issue 513, pages 721–737, July 2006
How to Cite
Flodén, M. (2006), Labour Supply and Saving Under Uncertainty. The Economic Journal, 116: 721–737. doi: 10.1111/j.1468-0297.2006.01108.x
- Issue published online: 11 JUL 2006
- Article first published online: 11 JUL 2006
- Submitted: 7 January 2000 Accepted: 4 May 2005
This article examines how variations in labour supply can be used to self-insure against wage uncertainty and the impact of such self-insurance on precautionary saving. The analytical framework is a two-period model with saving and labour-supply decisions, where preferences are consistent with balanced growth. The main findings are that (i) labour-supply flexibility raises precautionary saving when future wages are uncertain, and (ii) uncertainty about future wages raises current labour supply and reduces future labour supply.