Changing labor markets in unequal societies: Challenges from heterogeneity in labor market risk

• Applicant: Professor Dr. Moritz Kuhn
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: from 2020 to 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 433368816

Labor markets undergo constant change. Drastic policy reforms like the Hartz reforms in Germany, technological change from digitalization and automation in all industrialized countries, and rising global competition from China and others have raised concerns that changes in labor markets have even accelerated so that today’s workforce faces higher labor market risks, less job security, and high levels of inequality. Higher labor market risks from unemployment and lower job security from the disappearance of life-time jobs but also opportunities that arise from technological change and globalization are likely not the same for all workers and might differ substantially across the workforce. It is conceivable that fast-paced labor market change even amplified the existing differences and reinforced concerns of increased labor market risks and rising inequality. But how large are differences in labor market risks? How do these differences shape consumption and financial decision-making of households? How do they affect key financial decisions like homeownership? Should governments redesign social security systems like the unemployment or old-age pension system to take heterogeneity in labor market risk into account? Economic research still lacks answers to such pivotal questions. The proposed research project aims at filling this void. It builds on recent advances in theoretical and empirical economic research and relies on high-quality microdata from different sources in providing answers. While taking a macroeconomic viewpoint, the work program reaches out into different fields from applied microeconomics to public finance, and economic theory.The goal of the empirical part of the project is to provide new evidence on heterogeneity in labor market risk using German social security data and to document facts on the relationship between households’ labor market experience and their financial situation. The goal for the theoretical part is to develop a model framework that incorporates heterogeneity in labor market risk into a model of financial decision making. The model is going to feature interacting labor market decisions, earnings dynamics, and financial decision making, and furthermore, earnings dynamics that adapt to changes in the macroeconomic environment be it from labor market reforms or technological change. I also plan to further refine financial decision making by incorporating an additional portfolio choice decision that represents the distinctive properties of the housing market. If the research program will be successful, then using these newly developed models in combination with the empirical evidence will enable me to address pressing questions regarding changing labor markets in unequal societies. The answers the research program can give will be paramount to address important macroeconomic and public policy questions.

• DFG Programme: Research Grants