The Nature of Countercyclical Income Risk

63 Pages Posted: 11 May 2013

See all articles by Fatih Guvenen

Fatih Guvenen

University of Minnesota - Department of Economics; National Bureau of Economic Research (NBER)

Serdar Ozkan

Federal Reserve Banks - Federal Reserve Bank of St. Louis; University of Toronto

Jae Song

U.S. Social Security Administration

Multiple version iconThere are 2 versions of this paper

Date Written: November 11, 2012

Abstract

This paper studies the nature of business cycle variation in individual earnings risk using a dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of anonymous individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual earnings growth during recessions into "between-group" and "within-group" components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses -- large upward earnings movements become less likely -- whereas the bottom end expands -- large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, riskier during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics -- the average earnings of an individual at the beginning of a business cycle episode -- proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (such "asymmetry" is not evident in expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals -- even relative to those in the top 2 to 5 percent.

Keywords: Countercyclical income risk, idiosyncratic labor income

JEL Classification: E24, E32, J21, J31

Suggested Citation

Guvenen, Fatih and Ozkan, Serdar and Song, Jae, The Nature of Countercyclical Income Risk (November 11, 2012). FEDS Working Paper No. 2013-25, Available at SSRN: https://ssrn.com/abstract=2262770 or http://dx.doi.org/10.2139/ssrn.2262770

Fatih Guvenen

University of Minnesota - Department of Economics ( email )

Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Serdar Ozkan (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

Jae Song

U.S. Social Security Administration ( email )

Washington, DC 20254
United States
202-358-6403 (Phone)
202-358-6192 (Fax)

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