Abstract

This paper aims to quantify the mechanisms and the extent to which parental wage risk passes through to children’s skill development. Through a quantitative labor supply model in which parents choose time spent working, time spent with children, and child-related expenditures, we find that income risk lowers skill accumulation, permanently lowering children’s skill levels. To the extent that making up for skill losses during childhood is hard—as the available evidence suggests—income risk with imperfect credit markets can negatively impact the labor market prospects of future generations.