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Dissecting Idiosyncratic Earnings Risk

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This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic.

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  • Elin Halvorsen & Hans Holter & Serdar Ozkan & Kjetil Storesletten, 2022. "Dissecting Idiosyncratic Earnings Risk," Working Papers 2022-024, Federal Reserve Bank of St. Louis, revised 02 Mar 2023.
    • Handle: RePEc:fip:fedlwp:94799
    DOI: 10.20955/wp.2022.024
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    Cited by:

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    2. Kindermann, Fabian & Pueschel, Veronika, 2021. "Progressive Pensions as an Incentive for Labor Force Participation," CEPR Discussion Papers 16380, C.E.P.R. Discussion Papers.
    3. Darapheak Tin & Chung Tran, 2023. "Lifecycle Earnings Risk and Insurance: New Evidence from Australia," The Economic Record, The Economic Society of Australia, vol. 99(325), pages 141-174, June.
    4. Ragnar Enger Juelsrud & Ella Getz Wold, 2023. "The importance of unemployment risk for individual savings," Working Papers 06/2023, Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School.
    5. Edmund Crawley & Martin Holm & Håkon Tretvoll, 2022. "A Parsimonious Model of Idiosyncratic Income," Finance and Economics Discussion Series 2022-026, Board of Governors of the Federal Reserve System (U.S.).
    6. Ana Sofia Pessoa, 2021. "Earnings Dynamics in Germany," CESifo Working Paper Series 9117, CESifo.
    7. Broer, Tobias & Kramer, John & Mitman, Kurt, 2022. "The Curious Incidence of Monetary Policy Across the Income Distribution," Working Paper Series 416, Sveriges Riksbank (Central Bank of Sweden).
    8. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.
    9. Ursula Mello & Tomas Rodriguez Martinez, 2020. "Trade-induced Local Labor Market Shocks and Asymmetrical Labor Income Risk," Working Papers 1230, Barcelona School of Economics.

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    More about this item

    Keywords

    earnings dynamics; income shocks; insurance; wages; hours; higher-order earnings risk; skewness; kurtosis; machine learning;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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