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Changes in the Distribution of Income Volatility

Author

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  • Jensen

    (Shane: Wharton School)

  • Shore

    (Stephen: Johns Hopkins University)

Abstract

Research documenting an increase in income risk in recent decades has treated its proxy -- income volatility, the expected magnitude of income changes -- as if it were the same for everyone. In reality, some people face more risk than others. We develop a Markovian hierarchical Dirichlet process (MHDP) prior to model the evolution of the distribution of income volatilities, not just the mean. This augments the recently-developed hierarchical Dirichlet process (HDP) prior to accommodate the serial dependence of panel data. We find that increases over time in mean volatility can be attributed solely to increases in volatility at the right tail; the risky are getting riskier while the rest of the distribution remains unchanged. This has strong welfare implications, as those facing increasing volatility may also be the most risk tolerant, as evidenced by their willingness to take on income risk.

Suggested Citation

  • Jensen & Shore, 2008. "Changes in the Distribution of Income Volatility," 2008 Meeting Papers 82, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:82
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    References listed on IDEAS

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    1. Martin Browning & Mette Ejrnæs & Javier Alvarez, 2010. "Modelling Income Processes with Lots of Heterogeneity," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1353-1381.
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    5. Sam Schulhofer-Wohl, 2007. "Heterogeneity, Risk Sharing and the Welfare Costs of Risk," 2007 Meeting Papers 926, Society for Economic Dynamics.
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    Cited by:

    1. Champagne, Julien & Kurmann, André & Stewart, Jay, 2017. "Reconciling the divergence in aggregate U.S. wage series," Labour Economics, Elsevier, vol. 49(C), pages 27-41.
    2. Olga Gorbachev & Keshav Dogra, 2009. "Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004," Edinburgh School of Economics Discussion Paper Series 193, Edinburgh School of Economics, University of Edinburgh.
    3. L. Hospido, 2012. "Modelling heterogeneity and dynamics in the volatility of individual wages," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(3), pages 386-414, April.
    4. Liu, Kai, 2015. "Wage Risk and the Value of Job Mobility in Early Employment Careers," IZA Discussion Papers 9256, Institute of Labor Economics (IZA).
    5. Molly Dahl & Thomas DeLeire & Jonathan A. Schwabish, 2011. "Estimates of Year-to-Year Volatility in Earnings and in Household Incomes from Administrative, Survey, and Matched Data," Journal of Human Resources, University of Wisconsin Press, vol. 46(4), pages 750-774.
    6. Claudia M. Buch, 2008. "The Great Risk Shift? Income Volatility in an International Perspective," CESifo Working Paper Series 2465, CESifo.
    7. Betsey Stevenson & Justin Wolfers, 2008. "Happiness Inequality in the United States," The Journal of Legal Studies, University of Chicago Press, vol. 37(S2), pages 33-79, June.
    8. Julien Champagne & André Kurmann, 2010. "The Great Increase in Relative Volatility of Real Wages in the United States," Cahiers de recherche 1010, CIRPEE.
    9. Johannes Martin, 2013. "The Impact on Earnings When Entering Self-Employment: Evidence for Germany," SOEPpapers on Multidisciplinary Panel Data Research 537, DIW Berlin, The German Socio-Economic Panel (SOEP).
    10. Keshav Dogra & Olga Gorbachev, 2016. "Consumption Volatility, Liquidity Constraints and Household Welfare," Economic Journal, Royal Economic Society, vol. 126(597), pages 2012-2037, November.
    11. Peter Gottschalk & Robert Moffitt, 2009. "The Rising Instability of U.S. Earnings," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 3-24, Fall.
    12. Robert Moffitt & Peter Gottschalk, 2008. "Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004," Boston College Working Papers in Economics 697, Boston College Department of Economics.
    13. Meghir, Costas & Pistaferri, Luigi, 2011. "Earnings, Consumption and Life Cycle Choices," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 9, pages 773-854, Elsevier.
    14. Sam Schulhofer-Wohl & Andriy Norets, 2009. "Heterogeneity in income processes," 2009 Meeting Papers 999, Society for Economic Dynamics.
    15. Kelly D. Edmiston, 2009. "Characteristics of high foreclosure neighborhoods in the Tenth District," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q II), pages 51-75.
    16. Kai Liu, 2010. "Wage Risk, On-the-job Search and Partial Insurance," 2010 Meeting Papers 1136, Society for Economic Dynamics.
    17. Julien Champagne, 2015. "The Carrot and the Stick: The Business Cycle Implications of Incentive Pay in the Labor Search Model," Staff Working Papers 15-35, Bank of Canada.
    18. Jeffrey Brown & Chichun Fang & Francisco Gomes, 2012. "Risk and Returns to Education," NBER Working Papers 18300, National Bureau of Economic Research, Inc.
    19. Whalley, Alexander, 2011. "Education and labor market risk: Understanding the role of data cleaning," Economics of Education Review, Elsevier, vol. 30(3), pages 528-545, June.
    20. Claudia M. Buch, 2013. "Has Labor Income Become More Volatile? Evidence from International Industry-Level Data," German Economic Review, Verein für Socialpolitik, vol. 14(4), pages 399-431, November.
    21. Brown, Jeffrey R. & Fang, Chichun & Gomes, Francisco, 2015. "Risks and returns to education over time," CFS Working Paper Series 512, Center for Financial Studies (CFS).
    22. Louis Chauvel & Anne Hartung & Flaviana Palmisano, 2017. "Dynamics of Income Rank Volatility: Evidence from Germany and the US," SOEPpapers on Multidisciplinary Panel Data Research 926, DIW Berlin, The German Socio-Economic Panel (SOEP).
    23. Champagne, Julien & Kurmann, André, 2013. "The great increase in relative wage volatility in the United States," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 166-183.

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