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Household income uncertainties over three decades

  • James Feigenbaum
  • Geng Li

We study the trend in household income uncertainty using a novel approach that measures income uncertainty as the variance of forecast errors at each future horizon separately without imposing parametric restrictions on the underlying income shocks. We find that household income uncertainty has risen significantly and persistently since the early 1970s. For example, our measure of near-future uncertainty in total family non-capital income rose about 40 percent between 1971 and 2002. This rising uncertainty is likely due to the increase in variances of both persistent and transitory income shocks. Although the increase in uncertainty was widespread, the increase was most pronounced among single-earner households and high-income households. A parsimoniously calibrated Aiyagari (1994) model is solved to illustrate how rising income uncertainty affects aggregate saving.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-25.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-25
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  1. Michael Baker & Gary Solon, 2003. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 267-288, April.
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  3. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
  4. Peter Gottschalk & Robert Moffitt, 2009. "The Rising Instability of U.S. Earnings," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 3-24, Fall.
  5. Margaret M. McConnell & Gabriel Perez Quiros, 1997. "Output fluctuations in the United States: what has changed since the early 1980s?," Research Paper 9735, Federal Reserve Bank of New York.
  6. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2007. "The evolution of household income volatility," Finance and Economics Discussion Series 2007-61, Board of Governors of the Federal Reserve System (U.S.).
  7. Tony Smith & M. Fatih Guvenen, 2007. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," 2007 Meeting Papers 1024, Society for Economic Dynamics.
  8. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2006. "Financial innovation and the Great Moderation: what do household data say?," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  9. James Feigenbaum & Geng Li, 2008. "Lifecycle Dynamics of Income Uncertainty and Consumption," Working Papers 360, University of Pittsburgh, Department of Economics, revised Jul 2008.
  10. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  11. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc.
  12. Cunha, Flavio & Heckman, James J. & Navarro, Salvador, 2004. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," IZA Discussion Papers 1437, Institute for the Study of Labor (IZA).
  13. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  14. Olga gorbachev, 2007. "Did Household Consumption Become More Volatile?," ESE Discussion Papers 161, Edinburgh School of Economics, University of Edinburgh.
  15. James Feigenbaum, 2006. "Precautionary Saving Unfettered," Working Papers 227, University of Pittsburgh, Department of Economics, revised Jan 2006.
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