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Modelling income risk dynamics in the UK: a parametric approach

Author

Listed:
  • D’Amico , Marco

    (Uppsala University)

  • Fazio, Martina

    (Bank of England)

Abstract

This paper uses rich, administrative-quality data on earnings in the UK from the Annual Survey of Hours and Earnings (ASHE) to provide a detailed analysis of income risk and its patterns across individuals and over time. We develop a model of income dynamics that accounts for the broader state of the economy and successfully captures key features of the UK earnings growth distribution, including: a cyclical variance, procyclical skewness (more frequent negative earnings shocks during recessions), and a distribution that combines sharp peaks with long, heavy tails. The model is simple enough to be integrated into broader macroeconomic frameworks, such as heterogeneous agent models, and could be used to support policy scenario analysis.

Suggested Citation

  • D’Amico , Marco & Fazio, Martina, 2025. "Modelling income risk dynamics in the UK: a parametric approach," Bank of England working papers 1129, Bank of England.
    • Handle: RePEc:boe:boeewp:1129
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/modelling-income-risk-dynamics-in-the-uk-a-parametric-approach.pdf
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    More about this item

    Keywords

    Idiosyncratic risk; income dynamics; inequality; income process;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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