The Interplay between Labor and Financial Markets: What are the Implications for Defined Contribution Accounts?

The relationship between earnings, savings and retirement is well-known; however the linkage between labor market outcomes and financial market performance is generally unacknowledged. This Working Paper examines the implications of the link between labor markets and financial markets for workers who save money in individual retirement accounts. Specifically, differences in labor market outcomes across groups may imply differences in the timing of investments, which may reduce savings over time for these groups compared to their counterparts. Using monthly data from the Current Population Survey (1979-2002) we generate hypothetical investment portfolios using stock and bond indices. We exploit differences across demographic groups in unemployment and wage growth, and use these differences to examine each group