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Cyclical Labor Income Risk

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  • Makoto Nakajima
  • Vladimir Smirnyagin

Abstract

We investigate cyclicality of variance and skewness of household labor income risk using PSID data. There are five main findings. First, we find that head's labor income exhibits countercyclical variance and procyclical skewness. Second, the cyclicality of hourly wages is mutted, suggesting that head's labor income risk is mainly coming from the volatility of hours. Third, younger households face stronger cyclicality of income volatility than older ones, although the level of volatility is lower for the younger ones. Fourth, while a second earner helps lower the level of skewness, it does not mitigate the volatility of household labor income risk. Meanwhile, government taxes and transfers are found to mitigate the level and cyclicality of labor income risk volatility. Finally, among heads with strong labor market attachment, the cyclicality of labor income volatility becomes weaker, while the cyclicality of skewness remains.

Suggested Citation

  • Makoto Nakajima & Vladimir Smirnyagin, 2019. "Cyclical Labor Income Risk," Opportunity and Inclusive Growth Institute Working Papers 22, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmoi:0022
    DOI: 10.21034/iwp.22
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    Cited by:

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    3. Edouard Djeutem & Mario He & Abeer Reza & Yang Zhang, 2022. "Household Heterogeneity and the Performance of Monetary Policy Frameworks," Staff Working Papers 22-12, Bank of Canada.
    4. Rubén Domínguez Díaz, 2021. "Hiring Stimulus and Precautionary Savings in a Liquidity Trap," ECONtribute Discussion Papers Series 072, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    Labor income risk; Income inequality; Business cycles;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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