Hedging potential of occupational and regional wage indices

Abstract

This paper suggests a readily implementable approach to hedging occupational and regional wage risks. We show that currently available administrative data of the German social security system can be aggregated into indices of occupational and regional wage levels. We define assets with payouts depending on occupational and/or regional wage development. If such assets had been available in the past, the life-time earnings paths of different cohorts would have been more equal, although only to a limited extend. By construction, there are no moral hazard problems, and the incentives to move jobs or regions are not affected. We conclude that introducing these hedging instruments could mitigate shocks from globalization to some degree without case-by-case interference from politicians and without detrimental effects on labor allocation.