Countercyclical Earnings Risk and the Welfare Costs of Business Cycles

Using linked employee--employer data, we show that recessions shift earnings changes toward negative skewness through more frequent layoffs, larger post-layoff earnings losses, and fewer upward job moves. We discipline a Bewley--Huggett--Aiyagari model with directed search and aggregate productivity shocks using these empirical moments. The calibrated model reproduces the cyclical shift in earnings skewness and implies that eliminating business cycles generates a welfare gain equivalent to 4.9% of consumption on average. This gain falls to essentially zero when cyclical changes in individual labor market risk are removed. Persistent earnings losses following recessionary job loss account for most of the welfare cost.