The Impact of Labor Income Risk on Educational Choices: Estimates and Implied Risk Aversion

The paper uses a novel Danish data set on labor incomes and educational choices to document that the time-series risk of individual labor incomes has a significant effect on individuals' educational choices. We classify the full set of post-high school educations into 50 groups based on admissions requirements, length, and topic studied. Income processes are estimated for each education group and the estimates are used in an empirical choice model. The estimated choice model suggests a preference for educations with higher mean incomes and lower risk, with a high variance of permanent income shocks seen as particularly undesirable. Using a structural model of life-time utility maximization we conclude that the parameter estimates of the empirical choice model imply a relative risk aversion coefficient around 5.