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The Nature of Countercyclical Income Risk

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  • Fatih Guvenen
  • Serdar Ozkan
  • Jae Song

Abstract

This paper studies the cyclical nature of individual income risk using a confidential dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual income growth during recessions into “between-group” and “within-group” components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic income shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses—large upward income movements become less likely—whereas the bottom end expands—large drops in income become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics—the average income of an individual at the beginning of a business cycle episode—proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (which is not the case during expansions). Finally, we find that the cyclical nature of income risk is dramatically different for the top 1 percent compared with all other individuals—even relative to those in the top 2 to 5 percent.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18035.

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Date of creation: May 2012
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Publication status: published as The Nature of Countercyclical Income Risk (with S. Ozkan and J. Song), Journal of Political Economy, 2014, Vol. 122, No. 3, pp. 621-660.
Handle: RePEc:nbr:nberwo:18035

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  1. Rui Castro & Daniele Coen-Pirani, . "Why Have Aggregate Skilled Hours Become So Cyclical Since the Mid 1980s?," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2006-E27, Carnegie Mellon University, Tepper School of Business.
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  3. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(3), pages 695-717, June.
  4. Dynan Karen & Elmendorf Douglas & Sichel Daniel, 2012. "The Evolution of Household Income Volatility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(2), pages 1-42, December.
  5. Sam Schulhofer-Wohl, 2011. "Heterogeneity and tests of risk sharing," Staff Report, Federal Reserve Bank of Minneapolis 462, Federal Reserve Bank of Minneapolis.
  6. Rui Castro & Daniele Coen-Pirani, . "Why Have Aggregate Skilled Hours," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2006-E27, Carnegie Mellon University, Tepper School of Business.
  7. Almut Balleer & Thijs van Rens, 2008. "Skill-biased technological change and the business cycle," Economics Working Papers 1079, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2012.
  8. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 219-40, April.
  9. Katharine G. Abraham & Lawrence F. Katz, 1987. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," NBER Working Papers 1410, National Bureau of Economic Research, Inc.
  10. Sabelhaus, John & Song, Jae, 2010. "The great moderation in micro labor earnings," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(4), pages 391-403, May.
  11. Wojciech Kopczuk & Emmanuel Saez & Jae Song, 2010. "Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 91-128, February.
  12. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
  13. Giesecke, Matthias & Bönke, Timm & Lüthen, Holger, 2011. "The Dynamics of Earnings in Germany: Evidence from Social Security Records," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48692, Verein für Socialpolitik / German Economic Association.
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Cited by:
  1. Nicholas Bloom, 2013. "Fluctuations in Uncertainty," NBER Working Papers 19714, National Bureau of Economic Research, Inc.
  2. Facundo Piguillem & Anderson L. Schneider, 2010. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," EIEF Working Papers Series 1002, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2009.
  3. Stéphane Bonhomme & Laura Hospido, 2012. "The cycle of earnings inequality: evidence from Spanish social security data," Banco de Espa�a Working Papers 1225, Banco de Espa�a.
  4. Kartik Athreya, 2014. "Labor Market Upheaval, Default Regulations, and Consumer Debt," 2014 Meeting Papers, Society for Economic Dynamics 273, Society for Economic Dynamics.
  5. Lars Ljungvist & Thomas Sargent, 2014. "Career Length: Effects of Curvature of Earnings Profiles, Earnings Shocks, Taxes, and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 1-20, January.
  6. Kim, Seewon, 2013. "Prudent consumers: New evidence from the Consumer Expenditure Survey," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 77-85.
  7. Fatih Guvenen & Greg Kaplan & Jae Song, 2014. "How Risky Are Recessions for Top Earners?," American Economic Review, American Economic Association, American Economic Association, vol. 104(5), pages 148-53, May.
  8. Hui Chen & Michael Michaux & Nikolai Roussanov, 2013. "Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty," NBER Working Papers 19421, National Bureau of Economic Research, Inc.
  9. Fatih Guvenen, 2014. "Comment on "Labor Market Polarization over the Business Cycle"," NBER Chapters, in: NBER Macroeconomics Annual 2014, Volume 29 National Bureau of Economic Research, Inc.

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