Skewed Idiosyncratic Income Risk over the Business Cycle: Sources and Insurance
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Christopher Busch
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David Domeij
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Fatih Guvenen
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Rocio Madera
- American Economic Journal: Macroeconomics (Forthcoming)
Abstract
Recent studies have shown that idiosyncratic labor income risk
becomes more left-skewed during recessions. This procyclical skewness arises from a combination of higher downside risk and lower
chances of upward surprises during recessions. While this much is
known, some important open questions remain. For example, how
robust are these patterns across countries that differ in their institutions and policies, as well as across genders, education groups,
and occupations, among others? What is the contribution of wages
versus hours to procyclical skewness of earnings changes? To
what extent can skewness
fluctuations in individual earnings be
smoothed within households or with government policies? Using
panel data from the United States, Germany, Sweden, and France,
we find four main results. First, the skewness of individual income
growth (before-tax/transfer) is procyclical while its variance is
at
and acyclical in all three countries. Second, this result holds even
for full-time workers continuously employed in the same establishment, indicating that the hours margin is not the main driver;
additional analyses of hours and wages confirm that both margins are important. Third, within-household smoothing does not
seem effective at mitigating skewness
uctuations. Fourth, tax-and-transfer policies blunt some of the largest declines in incomes,
reducing procyclical
uctuations in skewness.
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