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Employment Time and the Cyclicality of Earnings Growth

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  • Davide Malacrino

    (Stanford University)

  • Eran Hoffmann

    (Stanford University)

Abstract

The cross-sectional distribution of log annual earnings growth becomes more negatively skewed during recessions. However, earnings growth is the sum of changes in employment time (weeks of employment within a year) and changes in earnings rate (weekly earnings). Distinguishing between the two sources of variation is important for interpreting the cyclical patterns of earnings growth. We use administrative data from Italy and survey data from the United States to disentangle the role of employment time in shaping the distribution of earnings growth. We find that year-to-year changes in employment time are responsible for almost all of the tail observations (bellow the 10th and above the 90th percentile), and generate more than four-fifths of the observed cross-sectional variance of earnings growth. Moreover, changes in employment time account for the cyclical properties of the skewness of the earnings growth distribution: the skewness of earnings growth is positively correlated with GDP growth but the correlation disappears when controlling for the skewness of changes in employment time. We show that the cyclicality of aggregate labor market conditions, including the separation rate and the hiring rate, explains the negative skewness of earnings growth during recessions.

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  • Davide Malacrino & Eran Hoffmann, 2016. "Employment Time and the Cyclicality of Earnings Growth," 2016 Meeting Papers 1556, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1556
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    3. Manuel Arellano & Stephane Bonhomme, 2019. "Recovering Latent Variables by Matching," Papers 1912.13081, arXiv.org.
    4. Agustin Velasquez & Svetlana Vtyurina, 2019. "How Does Taxation Affect Hours Worked in EU New Member States?," IMF Working Papers 2019/130, International Monetary Fund.
    5. Christopher Busch & David Domeij & Fatih Guvenen & Rocio Madera, 2018. "Asymmetric Business-Cycle Risk and Social Insurance," NBER Working Papers 24569, National Bureau of Economic Research, Inc.
    6. Blanco, Andrés & Diaz de Astarloa, Bernardo & Drenik, Andres & Moser, Christian & Trupkin, Danilo, 2021. "The Evolution of the Earnings Distribution in a Volatile Economy: Evidence from Argentina," MPRA Paper 105759, University Library of Munich, Germany.
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