IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The nature of countercyclical income risk

  • Fatih Guvenen
  • Serdar Ozkan
  • Jae Song

This paper studies the nature of business cycle variation in individual earnings risk using a dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of anonymous individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual earnings growth during recessions into "between-group" and "within-group" components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses--large upward earnings movements become less likely--whereas the bottom end expands--large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, riskier during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics--the average earnings of an individual at the beginning of a business cycle episode--proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (such "asymmetry" is not evident in expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals--even relative to those in the top 2 to 5 percent.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

File URL:
Download Restriction: no

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-25.

in new window

Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedgfe:2013-25
Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page:

More information through EDIRC

Order Information: Web:

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.:

as in new window
  1. Bönke, Timm & Giesecke, Matthias & Lüthen, Holger, 2015. "The dynamics of earnings in Germany: Evidence from social security records," Discussion Papers 2015/26, Free University Berlin, School of Business & Economics.
  2. Rui Castro & Daniele Coen-Pirani, . "Why Have Aggregate Skilled Hours," GSIA Working Papers 2006-E27, Carnegie Mellon University, Tepper School of Business.
  3. Abraham, Katharine G. & Katz, Lawrence F., 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Scholarly Articles 3442781, Harvard University Department of Economics.
  4. Almut Balleer and Thijs van Rens, 2012. "Skill-Biased Technological Change and the Business Cycle," Working Papers 560, Barcelona Graduate School of Economics.
  5. Sam Schulhofer-Wohl, 2011. "Heterogeneity and tests of risk sharing," Staff Report 462, Federal Reserve Bank of Minneapolis.
  6. CASTRO, Rui & COEN-PIRANI, Daniele, 2005. "Why Have Aggregate Skilled Hours Become so Cyclical since the Mid-1980’s?," Cahiers de recherche 24-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  8. Dynan Karen & Elmendorf Douglas & Sichel Daniel, 2012. "The Evolution of Household Income Volatility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(2), pages 1-42, December.
  9. N. Gregory Mankiw, 1986. "The Equity Premium and the Concentration of Aggregate Shocks," NBER Working Papers 1788, National Bureau of Economic Research, Inc.
  10. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
  11. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  12. Sabelhaus, John & Song, Jae, 2010. "The great moderation in micro labor earnings," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 391-403, May.
  13. repec:oup:qjecon:v:125:y:2010:i:1:p:91-128 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. The Nature of Countercyclical Income Risk (JPE 2014) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2013-25. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.