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Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks

Listed author(s):
  • Sanchez, Manuel

    ()

    (University of Bristol)

  • Wellschmied, Felix

    ()

    (Universidad Carlos III de Madrid)

Registered author(s):

    We study workers' idiosyncratic earnings risk over the life-cycle using a German administrative data set. Positive and negative earnings shocks both contain a highly persistent component. The variance and average size of positive persistent shocks is decreasing over the life-cycle. The (absolute) size of negative persistent shocks is increasing. The probability to experience either of these shocks is U-shaped in age; during prime-age it is around 35 percent. Negative transitory shocks are relatively larger and more dispersed than positive transitory shocks. Their size and variance are increasing over the life-cycle. Large persistent positive shocks early in life generate large wealth holdings for the top one percent of workers in an incomplete markets model. Moreover, age-varying risk implies a linear increase in consumption inequality late in working life.

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    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10925.

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    Length: 45 pages
    Date of creation: Jul 2017
    Handle: RePEc:iza:izadps:dp10925
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