From the Peaks to the Valleys: Cross-State Evidence on Income Volatility Over the Business Cycle

Posted: 25 Mar 2014

See all articles by Colleen Marie Carey

Colleen Marie Carey

Cornell University - Department of Policy Analysis and Management

Stephen H. Shore

Georgia State University

Date Written: September 10, 2010

Abstract

Counter-cyclical variation in individuals' idiosyncratic labor income risk could generate substantial welfare costs. Following past research, we infer income volatility - the variance of permanent income shocks, a standard proxy for income risk - from the rate at which cross-sectional variances of income rise over the life-cycle for a given cohort. Our novelty lies in exploiting cross-state variation in state economic conditions or state sensitivity to national economic conditions. We find that income volatility is higher in good state times than bad; during good national times, we find volatility is higher in states that are more sensitive to national conditions.

Keywords: income volatility, income dynamics over the business cycle

JEL Classification: D31, E32

Suggested Citation

Carey, Colleen Marie and Shore, Stephen H., From the Peaks to the Valleys: Cross-State Evidence on Income Volatility Over the Business Cycle (September 10, 2010). Review of Economics and Statistics, Vol. 95, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=2414027

Colleen Marie Carey (Contact Author)

Cornell University - Department of Policy Analysis and Management ( email )

Ithaca, NY
United States

Stephen H. Shore

Georgia State University ( email )

35 Broad Street
11th Floor
Atlanta, GA 30303-3083
United States

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