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

Author

Listed:
  • Colleen Carey

    (Johns Hopkins University)

  • Stephen H. Shore

    (Georgia State University)

Abstract

Countercyclical 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. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Colleen Carey & Stephen H. Shore, 2013. "From the Peaks to the Valleys: Cross-State Evidence on Income Volatility over the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 549-562, May.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:2:p:549-562
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    More about this item

    Keywords

    income volatility; state economic conditions;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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