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Time-Varying Risk Premia, Labor Market Dynamics, and Income Risk

Author

Listed:
  • Maarten Meeuwis
  • Dimitris Papanikolaou
  • Jonathan L. Rothbaum
  • Lawrence D.W. Schmidt

Abstract

We show that time variation in risk premia leads to time-varying idiosyncratic income risk for workers. Using US administrative data on worker earnings, we show that increases in risk premia lead to lower earnings for low-wage workers; these declines are primarily driven by job separations. By contrast, productivity shocks affect the earnings mainly of highly paid workers. We build an equilibrium model of labor market search that quantitatively replicates these facts. The model generates endogenous time-varying income risk in response to changes in risk premia and matches several stylized features of the data regarding unemployment and income risk over the business cycle.

Suggested Citation

  • Maarten Meeuwis & Dimitris Papanikolaou & Jonathan L. Rothbaum & Lawrence D.W. Schmidt, 2023. "Time-Varying Risk Premia, Labor Market Dynamics, and Income Risk," NBER Working Papers 31968, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31968
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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G1 - Financial Economics - - General Financial Markets
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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