ABSTRACT
This study investigates the impact of earnings risk on schooling and savings. I borrowed Basu and Ghosh’s (2001) model in order to develop a theoretical framework of a two-period model, which depicts the relationship between earnings risk, schooling, and savings. Using the Indonesia Family Life Survey (IFLS) dataset, I confirm that the decision to enter schooling is motivated by earnings risk. Earnings risk is measured by occupational earnings risk and by earnings range, or the variability between the maximum and minimum levels of earnings across the IFLS waves. This study has found that education decreases the variability of future income. Given that the pure risk effect is more dominant than the utility smoothing effect, it can be said that saving is to some extent inadequate for anticipating a decline in household income, owing to earning risks. The results also show that the earnings range is close to Basu and Ghosh’s predictions.
