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Dissecting Idiosyncratic Income Risk

Author

Listed:
  • Elin Halvorsen

    (Statistics Norway)

  • Hans Holter

    (University of Oslo)

  • Kjetil Storesletten

    (University of Oslo)

  • Serdar Ozkan

    (University of Toronto)

Abstract

Recent income dynamics literature has documented strong non-Gaussian features for annual earnings risk. In this paper, using the Norwegian Registry Data we investigate the sources of these nonnormalities as well as whether they are also present in household before- and after- tax income dynamics. We first show that individual earnings growth in Norway, similar to the U.S., is strongly left skewed and leptokurtic. Interestingly, the variation in the extent of these nonnormalities over the life-cycle and between income groups are almost identical between these two economies. We next investigate wage and hours components of earnings growth and find that wage changes are also left-skewed and leptokurtic with magnitudes and patterns similar to those of earnings growth. Furthermore, large earnings changes are mostly driven by changes in wages for high-earners, but the split between wages and hours is more equal for workers with low earnings. By decomposing the higher order moments of earnings growth into its wage and hours components, we find that the shape of their joint distribution is at least as important as the nonnormalities in the marginal distributions of wage and hours growth. Finally, we study how much spousal income and taxes and transfers provide insurance against long tails of earnings growth. We first find that spouses do not change their earnings as a response to changes in their husbands income. Second, redistributive Norwegian public insurance system reduces household income risk significantly but much more so for low-income families. Thus, we find a less pronounced left skewness and excess kurtosis in the household disposable income growth distribution.

Suggested Citation

  • Elin Halvorsen & Hans Holter & Kjetil Storesletten & Serdar Ozkan, 2019. "Dissecting Idiosyncratic Income Risk," 2019 Meeting Papers 1337, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1337
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    Cited by:

    1. Pedro Brinca & Miguel H. Ferreira & Francesco Franco & Hans A. Holter & Laurence Malafry, 2021. "Fiscal Consolidation Programs And Income Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 405-460, February.
    2. 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).
    3. De Nardi, Mariacristina & Fella, Giulio & ,, 2020. "Wage Risk and Government and Spousal Insurance," CEPR Discussion Papers 15608, C.E.P.R. Discussion Papers.
    4. Fatih Karahan & Serdar Ozkan & Jae Song, 2019. "Anatomy of Lifetime Earnings Inequality: Heterogeneity in Job Ladder Risk vs. Human Capital," Staff Reports 908, Federal Reserve Bank of New York.
    5. Fatih Guvenen & Fatih Karahan & Serdar Ozkan & Jae Song, 2021. "What Do Data on Millions of U.S. Workers Reveal About Lifecycle Earnings Dynamics?," Econometrica, Econometric Society, vol. 89(5), pages 2303-2339, September.
    6. Elin Halvorsen & Serdar Ozkan & Sergio Salgado, 2021. "Earnings Dynamics and Its Intergenerational Transmission: Evidence from Norway," Working Papers 2021-015, Federal Reserve Bank of St. Louis, revised 07 Jul 2022.

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