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Understanding Higher-Order Moments in Earnings Dynamics: A Search-Theoretic Approach

Author

Listed:
  • Serdar Ozkan

    (University of Toronto)

  • Fatih Karahan

    (Federal Reserve Bank of New York)

  • Sam Kapon

    (Federal Reserve Bank of New York)

Abstract

Recently, Guvenen et al. (2014) have shown that the distribution of earnings changes display large excess kurtosis and negative skewness. In particular, most workers experience little changes to their annual earnings, whereas a small group experience very large fluctuations. Moreover, experiencing large earnings declines is more likely than seeing big positive earnings growth. Importantly, both of these features comove with age and income: earnings changes tend to become more negatively skewed and leptokurtic with age and income. In this paper we investigate the role of search friction in explaining the higher-order moments of earnings growth. More specifically, we quantify the relative importance of search frictions, productivity risk and heterogeneity in shaping idiosyncratic earnings risk over the working life, and in particular their relative contributions to higher-order moments. To that end, we estimate an equilibrium job search model featuring employer competition and use it as a measurement device.

Suggested Citation

  • Serdar Ozkan & Fatih Karahan & Sam Kapon, 2016. "Understanding Higher-Order Moments in Earnings Dynamics: A Search-Theoretic Approach," 2016 Meeting Papers 1597, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1597
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