IDEAS home Printed from https://ideas.repec.org/p/red/sed012/266.html
   My bibliography  Save this paper

Income Risk in Recessions

Author

Listed:
  • Serdar Ozkan

    (Federal Reserve Board)

  • Jae Song

    (Social Security Administration)

  • Fatih Guvenen

    (University of Minnesota)

Abstract

This paper studies how recessions affect individual income risk. We employ a unique and confidential administrative data set with tens of millions of observations on individual earnings histories from the Social Security Administration records. We use a dataset that is a 10% random sample of the US population and covers the period from 1978 until 2010, encompassing the Great Recession of 2007--2009. We use these data to measure the effects of the recession on workers with different backgrounds. Our first set of findings concerns the cyclical nature of idiosyncratic shocks. We find that income shock variances are not countercyclical. Instead, it is the left skewness of shocks that is countercyclical. That is, during recessions, the upper end of the shock distribution collapses---i.e., large upward wage movements become less likely---whereas the bottom end expands---i.e., large drops in incomes become more likely. Moreover, the center of the shock distribution is very stable and moves very little compared to either tail. Second, we examine the systematic component of business cycle risk. We study three separate dimensions: whether the income loss during recession depends on (i) one's ranking in the lifetime income distribution, (ii) one's inherent sensitivity to business cycles as measured by the correlation of one's earnings with the cycle (excluding the recession under study), and (iii) one's income growth right before the recession. We find all three to matter for the fortunes of workers during recessions. In fact, for deep recessions (e.g., 1980--83 and 2008--2010), most of the rise in income inequality is due to this “factor structure†---i.e., the systematic divergence of incomes between groups of workers that are observationally different before the recession. To give one example, during the Great Recession, workers in the 20th percentile of the lifetime income distribution, on average, experienced a decline in their income that was nearly 10% more than the decline for workers who were in the 90th percentile of the distribution.

Suggested Citation

  • Serdar Ozkan & Jae Song & Fatih Guvenen, 2012. "Income Risk in Recessions," 2012 Meeting Papers 266, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:266
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2012/paper_266.pdf
    Download Restriction: no

    More about this item

    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:red:sed012:266. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.