Changes in the Distribution of Income Volatility
Recent research has documented a significant rise in the volatility (e.g., expected squared change) of individual incomes in the U.S. since the 1970s. Existing measures of this trend abstract from individual heterogeneity, effectively estimating an increase in average volatility. We decompose this increase in average volatility and find that it is far from representative of the experience of most people: there has been no systematic rise in volatility for the vast majority of individuals. The rise in average volatility has been driven almost entirely by a sharp rise in the income volatility of those expected to have the most volatile incomes, identified ex-ante by large income changes in the past. We document that the self-employed and those who self-identify as risk-tolerant are much more likely to have such volatile incomes; these groups have experienced much larger increases in income volatility than the population at large. These results color the policy implications one might draw from the rise in average volatility. While the basic results are apparent from PSID summary statistics, providing a complete characterization of the dynamics of the volatility distribution is a methodological challenge. We resolve these difficulties with a Markovian hierarchical Dirichlet process that builds on work from the non-parametric Bayesian statistics literature.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- J. Geweke & M. Keane, "undated".
"An Empirical Analysis of Income Dynamics among Men in the PSID: 1968–1989,"
Institute for Research on Poverty Discussion Papers
1127-97, University of Wisconsin Institute for Research on Poverty.
- John F. Geweke & Michael P. Keane, 1997. "An empirical analysis of income dynamics among men in the PSID: 1968-1989," Staff Report 233, Federal Reserve Bank of Minneapolis.
- Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, 01.
- Costas Meghir & Luigi Pistaferri, 2001. "Income variance dynamics and heterogenity," IFS Working Papers W01/07, Institute for Fiscal Studies.
- Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers 3632, C.E.P.R. Discussion Papers.
- Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
- Mary C. Daly & Greg J. Duncan, 1997. "Earnings mobility and instability, 1969-1995," Working Papers in Applied Economic Theory 97-06, Federal Reserve Bank of San Francisco.
- Comin, Diego & Groshen, Erica L. & Rabin, Bess, 2009. "Turbulent firms, turbulent wages?," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 109-133, January.
- Diego Comin & Erica L. Groshen & Bess Rabin, 2006. "Turbulent Firms, Turbulent Wages?," NBER Working Papers 12032, National Bureau of Economic Research, Inc.
- Diego Comin & Erica L. Groshen & Bess Rubin, 2006. "Turbulent firms, turbulent wages?," Staff Reports 238, Federal Reserve Bank of New York.
- Haider, Steven J, 2001. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 799-836, October.
- Steven J. Haider, 2000. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Working Papers 00-15, RAND Corporation.
- Haider, S.J., 2000. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Papers 00-15, RAND - Labor and Population Program.
- Shin, Donggyun & Solon, Gary, 2011. "Trends in men's earnings volatility: What does the Panel Study of Income Dynamics show?," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 973-982, August.
- Shin, Donggyun & Solon, Gary, 2011. "Trends in men's earnings volatility: What does the Panel Study of Income Dynamics show?," Journal of Public Economics, Elsevier, vol. 95(7), pages 973-982.
- Donggyun Shin & Gary Solon, 2008. "Trends in Men's Earnings Volatility: What Does the Panel Study of Income Dynamics Show?," NBER Working Papers 14075, National Bureau of Economic Research, Inc.
- Robert A. Moffitt & Peter Gottschalk, 2002. "Trends in the Transitory Variance of Earnings in the United States," Economic Journal, Royal Economic Society, vol. 112(478), pages 68-73, March.
- Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
- John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
- Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
- Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.