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Countercyclical Earnings Risk and the Welfare Costs of Business Cycles

Author

Listed:
  • Braxton, John

    (University of Wisconsin-Madison)

  • Eley, Marlena

    (University of Wisconsin)

  • Rothbaum, Jonathan

    (US Census Bureau)

  • Sledz, Shannon

    (Joint Committee on Taxation)

Abstract

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.

Suggested Citation

  • Braxton, John & Eley, Marlena & Rothbaum, Jonathan & Sledz, Shannon, 2026. "Countercyclical Earnings Risk and the Welfare Costs of Business Cycles," IZA Discussion Papers 18962, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18962
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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