The Dynamics of Income: Celebrating 50 years of the PSID
Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: David Johnson, University of Michigan
Nonlinear Persistence and Partial Insurance: Income Dynamics and Consumption Insurance in the PSID
AbstractWe highlight the important role the PSID has played in the development of our understanding of income dynamics and partial insurance. We examine alternative ways of modeling income persistence and focus on the nonlinear nature of income shocks. We explore a new quantile-based panel data framework, in which the persistence of past income shocks is allowed to vary according to the size and sign of the current shock. We show this approach matches the data well and, exploiting the enhanced consumption and asset data in recent waves of the PSID, show it also has key implications for consumption insurance. We confirm the results on income dynamics using the extensive population register data from Norway. The approach is used to provide new empirical measures of partial insurance in which the transmission of income shocks to consumption varies systematically with assets, the level of the shock and the history of past shocks.
Recent Trends in the Variability of Men’s Earnings: Evidence From Administrative and Survey Data
AbstractDespite the rise in cross-sectional inequality since the late 1990s, the literature on earnings instability shows little consensus on trends during this period. Using consistent samples and methods in administrative and survey data, we examine earnings instability for men from 1978 through 2011, estimating simple measures of earnings volatility and error components models of earnings. We find that earnings instability increased after the mid 1990s, with increases that are nearly as large as the increases in the 1970s and 1980s. The increase occurs in both survey and administrative data and is driven largely by increases in transitory earnings variability.
How Much Consumption Insurance in the United States?
AbstractMost of what the profession knows about joint income and consumption dynamics at the household level in the U.S. is based on the data from the Panel Study of Income Dynamics (PSID). We find that there are two sets of households in the PSID that differ dramatically in the dynamics of their income and consumption. Households headed by the original PSID males and their sons have a highly persistent income process, and permanent shocks to their incomes almost fully pass through to consumption. Households headed by males who marry daughters of the original PSID members have a much less persistent income process and a dramatically higher degree of consumption insurance. These differences are surprising but highly robust. Conditional on income dynamics, the degree of insurance in each subsample is consistent with the prediction of the standard incomplete-markets model. This result stands in contrast to the famous puzzle in Blundell, Pistaferri, and Preston (2008) of excess insurance of permanent income shocks for the combined sample.
- J3 - Wages, Compensation, and Labor Costs
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy