The Effects of Risk Aversion on Job Matching: Can Differences in Risk Aversion Explain the Wage Gap?

Previous research has shown that more risk averse workers are at a disadvantage when bargaining over wages. However, it has yet to be determined whether this differential treatment can be sustained in markets where equally productive workers differ in their attitudes toward risk. This paper investigates the question by examining a simple matching model in which the standard assumptions of risk neutrality and homogeneity are relaxed. It is shown that more risk averse workers have lower reservation wages, and conditional on productivity they receive lower wages. Thus, they are faced with a wage distribution which is stochastically dominated by that of less risk averse workers. As a result more risk averse workers are less likely to enter the labor force, and their unemployment rate and duration are smaller. Evidence from the psychology literature and recent empirical evidence in economics indicate that women are more risk averse than men. The results presented in this paper therefore suggest that gender differences in risk aversion may provide an alternative explanation for the observed differences in male and female labor market experiences. Contrary to most discrimination models, this model is consistent with both utility and profit maximization in the long run.