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The Nature of Countercyclical Income Risk

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  • Fatih Guvenen
  • Serdar Ozkan
  • Jae Song

Abstract

We study business cycle variation in individual earnings risk using a confidential and very large data set from the US Social Security Administration. Contrary to past research, we find that the variance of idiosyncratic shocks is not countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical: during recessions, large upward earnings movements become less likely, whereas large drops in earnings become more likely. Second, we find that the fortunes during recessions are predictable by observable characteristics before the recession. Finally, the cyclicality of earnings risk is dramatically different for the top 1 percent compared with the rest of the population.

Suggested Citation

  • Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
  • Handle: RePEc:ucp:jpolec:doi:10.1086/675535
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    References listed on IDEAS

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    JEL classification:

    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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