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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.

Suggested Citation

  • 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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