What Determines Earnings and Employment Risk?

The mean, the variance and higher moments of the distribution of future income are crucial determinants of individual choices. These moments are usually estimated in panel data from past income realizations. In this paper we rely instead on subjective expectations available in the 1995 Survey of Household Income and Wealth, a large random sample representative of Italian households. The survey elicits information on the distribution of future earnings and on the probability of unemployment in a parsimonious way. This allows us to estimate the distribution of future income for each individual in the sample. We compare income risk in Italy, the United States and Netherlands and relate various moments of these distributions to demographic variables observable in the cross-section. The data help us understanding how individual uncertainty evolves over the life cycle and if attitudes towards risk affect occupational choices and income riskiness.