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The authors specify a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions that allows to distinguish between different sources of risk and to estimate their effects. The sources of risk are shocks to productivity, job destruction, the process of job arrival when employed and unemployed and match level heterogeneity. In contrast to simpler models that attribute all income fluctuations to shocks, the framework disentangles variability due to shocks from variability due to the responses to these shocks. Estimates of productivity risk, once they control for employment risk and for individual labour supply choices, are substantially lower than estimates that attribute all wage variation to productivity risk.
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