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Asymmetric Business-Cycle Risk and Social Insurance

Author

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  • Christopher Busch
  • David Domeij
  • Fatih Guvenen
  • Rocio Madera

Abstract

This paper studies the business-cycle variation in higher-order (labor) income risk-that is, risks that are captured by moments higher than the variance of income changes. We examine the extent to which such risks can be smoothed within households or with government social insurance and tax policies. We use panel data from three countries that differ in many aspects relevant for our analysis: the United States, Germany, and Sweden. Our analysis has three main results. First, analyzing individual gross labor income, we document that skewness is procyclical and dispersion (variance) is flat and acyclical in Germany and Sweden, as was previously documented for the United States. The same patterns hold true for groups defined by education, gender, occupation, and public- versus private-sector jobs. Second, within-household smoothing appears to be not effective at mitigating business cycle fluctuations in skewness, and household- level income displays cyclical patterns that are very similar to individual income. Third, government tax and transfer programs blunt some of the largest declines in incomes, reducing procyclical fluctuations in skewness. The resulting welfare gain-through the lens of a structural model-amounts to 1.3% in consumption- equivalent terms for Sweden (for which we are able to perform this calculation). However, the remaining risk (in household disposable income) is still substantial: households are willing to pay 4.6% of their consumption to completely eliminate procyclical fluctuations in skewness.

Suggested Citation

  • Christopher Busch & David Domeij & Fatih Guvenen & Rocio Madera, 2018. "Asymmetric Business-Cycle Risk and Social Insurance," Working Papers 1031, Barcelona School of Economics.
  • Handle: RePEc:bge:wpaper:1031
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    Cited by:

    1. Hoffmann, Eran B. & Malacrino, Davide, 2019. "Employment time and the cyclicality of earnings growth," Journal of Public Economics, Elsevier, vol. 169(C), pages 160-171.
    2. Leonel Muinelo-Gallo & Ronald Miranda, 2020. "The Behaviour of Social Transfers over the Business Cycle: Empirical Evidence of Uruguay," Hacienda Pública Española / Review of Public Economics, IEF, vol. 233(2), pages 25-54, June.
    3. Makoto Nakajima & Vladimir Smirnyagin, 2019. "Cyclical Labor Income Risk," Opportunity and Inclusive Growth Institute Working Papers 22, Federal Reserve Bank of Minneapolis.
    4. Storesletten, Kjetil & Halvorsen, Elin & Holter, Hans & Ozkan, Serdar, 2020. "Dissecting Idiosyncratic Earnings Risk," CEPR Discussion Papers 15395, C.E.P.R. Discussion Papers.
    5. Manuel Arellano & Stéphane Bonhomme, 2023. "Recovering Latent Variables by Matching," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 118(541), pages 693-706, January.
    6. Konstantinos Angelopoulos & Spyridon Lazarakis & James Malley, 2019. "Cyclical income risk in Great Britain," Working Papers 2019_03, Business School - Economics, University of Glasgow.
    7. Ana Sofia Pessoa, 2021. "Earnings Dynamics in Germany," CESifo Working Paper Series 9117, CESifo.
    8. Pora, Pierre & Wilner, Lionel, 2020. "A decomposition of labor earnings growth: Recovering Gaussianity?," Labour Economics, Elsevier, vol. 63(C).
    9. Iseringhausen, Martin & Petrella, Ivan & Theodoridis, Konstantinos, 2021. "Aggregate Skewness and the Business Cycle," Cardiff Economics Working Papers E2021/30, Cardiff University, Cardiff Business School, Economics Section.
    10. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2020. "Disasters Everywhere: The Costs of Business Cycles Reconsidered," Staff Reports 925, Federal Reserve Bank of New York.
    11. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.
    12. De Nardi, Mariacristina & Fella, Giulio & Knoef, Marike & Paz-Pardo, Gonzalo & Van Ooijen, Raun, 2021. "Family and government insurance: Wage, earnings, and income risks in the Netherlands and the U.S," Journal of Public Economics, Elsevier, vol. 193(C).
    13. Sebastian Graves, 2020. "Does Unemployment Risk Affect Business Cycle Dynamics?," International Finance Discussion Papers 1298, Board of Governors of the Federal Reserve System (U.S.).
    14. Muinelo-Gallo, Leonel, 2022. "Business cycles and redistribution: The role of government quality," Economic Systems, Elsevier, vol. 46(4).
    15. Silvia Avram & Mike Brewer & Paul Fisher & Laura Fumagalli, 2022. "Household Earnings and Income Volatility in the UK, 2009–2017," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(2), pages 345-369, June.

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    More about this item

    Keywords

    idiosyncratic income risk; countercyclical risk; Business cycles; procyclical skewness; social insurance policy;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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