Wage Growth , Human Capital Investment and Risk Preference

Abstract

The aim of this paper is to explore how interpersonal variation in risk preference affects human capital investment and wage growth. To date, there has been a distinct lack of empirical research in this area despite the fact that the risk preference of individuals plays a key role in the theory of human capital accumulation. We investigate the link between risk preference, human capital investment and wage growth using data from five waves of the British Household Panel Survey. We exploit panel data enabling us to determine the change in real wages experienced by individuals across four different time horizons, 1995-96, 1995-98, 1995-2000 and 2000-2001. Our empirical analysis is based on a theoretical framework, which explicitly allows the risk preferences of individuals to influence human capital accumulation and, consequently, wage growth. Our findings support a positive relationship between less risk averse behaviour and wage growth with the relationship becoming more pronounced over time. In addition, our results suggest that less risk averse behaviour impacts positively on the returns to human capital investment.