The Great Risk Shift? Income Volatility in an International Perspective

43 Pages Posted: 20 Nov 2008

Date Written: November 2008

Abstract

Weakening bargaining power of unions and the increasing integration of the world economy may affect the volatility of capital and labor incomes. This paper documents and explains changes in income volatility. Using a theoretical framework which builds distribution risk into a real business cycle model, hypotheses on the determinants of the relative volatility of capital and labor are derived. The model is tested using industry-level data. The data cover 11 industrialized countries, 22 manufacturing and services industries, and a maximum of 35 years. The paper has four main findings. First, the unconditional volatility of labor and capital incomes has declined, reflecting the decline in macroeconomic volatility. Second, the idiosyncratic component of income volatility has hardly changed over time. Third, crosssectional heterogeneity in the evolution of relative income volatilities is substantial. If anything, the labor incomes of high- and low-skilled workers have become more volatile in relative terms. Fourth, income volatility is related to variables measuring the bargaining power of workers. Trade openness has no significant impact.

Keywords: income volatility, distribution risk, real business cycles

JEL Classification: E32, E25

Suggested Citation

Buch, Claudia M., The Great Risk Shift? Income Volatility in an International Perspective (November 2008). CESifo Working Paper Series No. 2465, Available at SSRN: https://ssrn.com/abstract=1303396 or http://dx.doi.org/10.2139/ssrn.1303396

Claudia M. Buch (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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