COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1110

Labor Income Indices Designed for Use
in Contracts Promoting Income Risk Management

Robert J. Shiller and Ryan Schneider

August 1995

    Labor income indices are created for groupings of individuals, using data from the Panel Study of Income Dynamics. People are grouped by a clustering algorithm based on an estimated transition matrix between jobs, by education level, and by skill category. The groups are defined so that relatively few people move between them. For each of the groupings, we generate a labor income index using a hedonic repeated-measures regression methodology. Similarities between pairs of indices and between indices and individual labor incomes are described. It is argued that indices like those presented here might someday be used in settlement formulae in contracts promoting income risk management.