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The Passthrough of the Business Cycle to Labor Income

Author

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  • Braggion, Fabio
  • Floccari, Giuseppe
  • Kvaerner, Jens

Abstract

We estimate firms’ business cycle passthrough—the extent to which they transmit economic fluctuations to workers’ labor income. Differences in passthrough explain most variation in workers’ systematic income risk: those with higher permanent income, middle-aged workers, and those on permanent contracts experience lower passthrough. Changes in hours, rather than wages, drive this variation, and passthrough is lower in recessions than in expansions. Workers recognize their passthrough, which is reflected in financial decisions. Our findings highlight how firm-worker risk-sharing leads to unequal effects of business cycle fluctuations across workers and influences household financial choices.

Suggested Citation

  • Braggion, Fabio & Floccari, Giuseppe & Kvaerner, Jens, 2025. "The Passthrough of the Business Cycle to Labor Income," CEPR Discussion Papers 20074, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20074
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    File URL: https://cepr.org/publications/DP20074
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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G5 - Financial Economics - - Household Finance

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