IDEAS home Printed from https://ideas.repec.org/p/irs/cepswp/2012-06.html
   My bibliography  Save this paper

Shaping earnings instability: labour market policy and institutional factors

Author

Listed:
  • SOLOGON Denisa
  • O'DONOGHUE Cathal

Abstract

The concerns regarding the economic insecurity stemming from earnings instability and volatility have been gaining momentum in the contemporary political discourse. If earnings instability/volatility is a proxy for risk, for risk-averse individuals, increasing earnings instability/volatility bears substantial welfare costs. Using the European Community Household Panel and the OECD labour market indicators, we explore the cross-national differences in earnings instability and earnings volatility across 14 European countries in the 1990s and the relationship between earnings instability/volatility, labour market institutions and macroeconomic shocks by means of non-linear least squares. Earnings instability is measured by the variance of transitory earnings, and earnings volatility by the standard deviation of the two-year changes in log earnings. Evaluated for the average country, we find that the employment protection legislation, the degree of corporatism and the deregulation in the product market are associated with a lower earnings instability and a lower earnings volatility. The institutions are found to shape the distributional effects of macroeconomic shocks on earnings instability and earnings volatility. The institutions which counteract the adverse effects of macroeconomic shocks on both earnings instability and earnings volatility, are a high corporatism, deregulated product markets and generous unemployment benefits. The institutions which counteract the adverse effects of macroeconomic shocks only on earnings volatility are the employment protection legislation and low tax-wedges on labour.

Suggested Citation

  • SOLOGON Denisa & O'DONOGHUE Cathal, 2012. "Shaping earnings instability: labour market policy and institutional factors," LISER Working Paper Series 2012-06, Luxembourg Institute of Socio-Economic Research (LISER).
    • Handle: RePEc:irs:cepswp:2012-06
    as

    Download full text from publisher

    File URL: https://www.liser.lu/publi_viewer.cfm?tmp=2665
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter Gottschalk & Enrico Spolaore, 2002. "On the Evaluation of Economic Mobility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 191-208.
    2. Denisa Maria Sologon & Cathal O'Donoghue, 2009. "Earnings Dynamics and Inequality in EU, 1994-2001," SOEPpapers on Multidisciplinary Panel Data Research 184, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Nicole M. Fortin & Thomas Lemieux, 1997. "Institutional Changes and Rising Wage Inequality: Is There a Linkage?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 75-96, Spring.
    4. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
    5. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    6. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, Decembrie.
    7. Denisa Maria Sologon & Cathal O’Donoghue, 2011. "Shaping Earnings Mobility: Policy and Institutional Factors," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 8(2), pages 175-202, December.
    8. Dickens, Richard, 2000. "Caught in a Trap? Wage Mobility in Great Britain: 1975-1994," Economica, London School of Economics and Political Science, vol. 67(268), pages 477-497, November.
    9. 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.
    10. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555, Elsevier.
    11. 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.
    12. Andrea Bassanini & Romain Duval, 2007. "The determinants of unemployment across OECD countries: Reassessing the role of policies and institutions," OECD Economic Studies, OECD Publishing, vol. 2006(1), pages 7-86.
    13. 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.
    14. Richard Blundell & Ian Preston, 1998. "Consumption Inequality and Income Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 603-640.
    15. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-1385, November.
    16. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-375, April.
    17. Dickens, Richard, 2000. "The Evolution of Individual Male Earnings in Great Britain: 1975-95," Economic Journal, Royal Economic Society, vol. 110(460), pages 27-49, January.
    18. Kalwij, Adriaan & Alessie, Rob, 2003. "Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects," IZA Discussion Papers 686, Institute of Labor Economics (IZA).
    19. Luis Ayala & Carolina Navarro & Mercedes Sastre, 2011. "Cross-country income mobility comparisons under panel attrition: the relevance of weighting schemes," Applied Economics, Taylor & Francis Journals, vol. 43(25), pages 3495-3521.
    20. Teulings,Coen & Hartog,Joop, 2008. "Corporatism or Competition?," Cambridge Books, Cambridge University Press, number 9780521049399.
    21. 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.
    22. SOLOGON Denisa & O'DONOGHUE Cathal, 2011. "Shaping persistent earnings inequality: labour market policy and institutional factors," LISER Working Paper Series 2011-22, Luxembourg Institute of Socio-Economic Research (LISER).
    23. Andrea Bassanini & Romain Duval, 2006. "The Determinants of Unemployment across OECD Countries," Post-Print halshs-00120584, HAL.
    24. William Milberg & Deborah Winkler, 2009. "Globalization, Offshoring and Economic Insecurity in Industrialized Countries," Working Papers 87, United Nations, Department of Economics and Social Affairs.
    25. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    26. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, vol. 47(2), pages 437-454, March.
    27. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    28. John Creedy & Mark Wilhelm, 2002. "Income Mobility, Inequality and Social Welfare," Australian Economic Papers, Wiley Blackwell, vol. 41(2), pages 140-150, June.
    29. Rudiger Ahrend & Jens Matthias Arnold & Charlotte Moeser, 2011. "The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks," OECD Economics Department Working Papers 877, OECD Publishing.
    30. Andrea Bassanini & Romain Duval, 2006. "Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions," OECD Social, Employment and Migration Working Papers 35, OECD Publishing.
    31. Creedy, John & Wilhelm, Mark, 2002. "Income Mobility, Inequality and Social Welfare," Australian Economic Papers, Wiley Blackwell, vol. 41(2), pages 140-150, June.
    32. Xavier Ramos, 2003. "The Covariance Structure of Earnings in Great Britain, 1991-1999," Economica, London School of Economics and Political Science, vol. 70(278), pages 353-374, May.
    33. Milton Friedman & Simon Kuznets, 1945. "Income from Independent Professional Practice," NBER Books, National Bureau of Economic Research, Inc, number frie54-1, March.
    34. Milton Friedman & Simon Kuznets, 1954. "The Data on Income from Independent Professional Practice," NBER Chapters, in: Income from Independent Professional Practice, pages 46-62, National Bureau of Economic Research, Inc.
    35. Buti,Marco & Deroose,Servaas & Gaspar,Vitor & Martins,João Nogueira (ed.), 2010. "The Euro," Cambridge Books, Cambridge University Press, number 9789279098420.
    36. repec:use:tkiwps:044 is not listed on IDEAS
    37. Satya Chakravarty, 2001. "The Variance as a subgroup decomposable measure of inequality," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 53(1), pages 79-95, January.
    38. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alessio Tomelleri, 2022. "Earnings instability and non-standard employment: cohort-based evidence from the Italian labour market," FBK-IRVAPP Working Papers 2022-02, Research Institute for the Evaluation of Public Policies (IRVAPP), Bruno Kessler Foundation.
    2. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Denisa Maria Sologon & Cathal O'Donoghue, 2014. "Shaping Earnings Insecurity: Labor Market Policy and Institutional Factors," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(S1), pages 205-232, May.
    2. Denisa Maria Sologon & Cathal O'Donoghue, 2009. "Earnings Dynamics and Inequality in EU, 1994-2001," SOEPpapers on Multidisciplinary Panel Data Research 184, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Sologon, Denisa Maria & O'Donoghue, Cathal, 2010. "Earnings Dynamics and Inequality among Men in Luxembourg, 1988-2004: Evidence from Administrative Data," IZA Discussion Papers 5014, Institute of Labor Economics (IZA).
    4. Cappellari, Lorenzo & Jenkins, Stephen P., 2014. "Earnings and labour market volatility in Britain, with a transatlantic comparison," Labour Economics, Elsevier, vol. 30(C), pages 201-211.
    5. Sologon, Denisa Maria & O'Donoghue, Cathal, 2009. "Earnings Dynamics and Inequality among Men across 14 EU Countries, 1994-2001: Evidence from ECHP," IZA Discussion Papers 4012, Institute of Labor Economics (IZA).
    6. Cappellari, Lorenzo & Jenkins, Stephen P., 2014. "Earnings and labour market volatility in Britain, with a transatlantic comparison," Labour Economics, Elsevier, vol. 30(C), pages 201-211.
    7. María Cervini-Plá & Xavier Ramos, 2012. "Long-Term Earnings Inequality, Earnings Instability and Temporary Employment in Spain: 1993–2000," British Journal of Industrial Relations, London School of Economics, vol. 50(4), pages 714-736, December.
    8. Otto Kässi, 2014. "Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability," Empirical Economics, Springer, vol. 46(2), pages 451-477, March.
    9. Joseph G. Altonji & Anthony A. Smith Jr. & Ivan Vidangos, 2013. "Modeling Earnings Dynamics," Econometrica, Econometric Society, vol. 81(4), pages 1395-1454, July.
    10. Stephen P. Jenkins, 2011. "Has the Instability of Personal Incomes been Increasing?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 218(1), pages 33-43, October.
    11. Giesecke, Matthias & Bönke, Timm & Lüthen, Holger, 2011. "The Dynamics of Earnings in Germany: Evidence from Social Security Records," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48692, Verein für Socialpolitik / German Economic Association.
    12. Lorenzo Cappellari, 2004. "The Dynamics and Inequality of Italian Men’s Earnings: Long-term Changes or Transitory Fluctuations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(2).
    13. Stephen Jenkins & Peter Lambert, 2011. "Robert Moffitt and Peter Gottschalk’s 1995 paper ‘Trends in the covariance structure of earnings in the US: 1969–1987’," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(3), pages 433-437, September.
    14. Kalwij, Adriaan & Alessie, Rob, 2003. "Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects," IZA Discussion Papers 686, Institute of Labor Economics (IZA).
    15. SOLOGON Denisa & VAN KERM Philippe, 2014. "Earnings dynamics, foreign workers and the stability of inequality trends in Luxembourg 1988-2009," LISER Working Paper Series 2014-03, Luxembourg Institute of Socio-Economic Research (LISER).
    16. repec:use:tkiwps:044 is not listed on IDEAS
    17. Cappellari, Lorenzo & Jenkins, Stephen P., 2013. "Earnings and Labour Market Volatility in Britain," IZA Discussion Papers 7491, Institute of Labor Economics (IZA).
    18. P. Jenkins, Stephen, 2009. "Spaghetti unravelled: a model-based description of differences in income-age trajectories," ISER Working Paper Series 2009-30, Institute for Social and Economic Research.
    19. Aedín Doris & Donal O’Neill & Olive Sweetman, 2013. "Identification of the covariance structure of earnings using the GMM estimator," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 11(3), pages 343-372, September.
    20. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.
    21. Sisi Zhang, 2010. "Recent Trends in Household Income Dynamics for the United States, Germany and Great Britain," Economics Bulletin, AccessEcon, vol. 30(2), pages 1154-1172.

    More about this item

    Keywords

    economic insecurity; earnings instabiloty; labour market institutions; labour market policies and institutions;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:irs:cepswp:2012-06. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Library and Documentation (email available below). General contact details of provider: https://edirc.repec.org/data/cepsslu.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.