New Version (May 2018): Asymmetric Business Cycle Risk and Social Insurance
with David Domeij, Fatih Guvenen, and Rocio Madera, NBER WP 24569
This paper studies the business-cycle variation in higher-order (labor) income risk—that is, risks that are captured by moments higher than the variance. We examine the extent to which such risks can be smoothed within households or with government social insurance and tax policies. We use panel data from three countries that differ in many aspects relevant for our analysis: the United States, Germany, and Sweden. Our analysis has three main results. First, using individual gross income, we document that skewness is procyclical and dispersion (variance) is flat and acyclical in Germany and Sweden, as was previously documented for the United States. The same patterns hold true for groups defined by education, gender, public- versus private-sector jobs, among others. Second, household-level income displays cyclical patterns that are very similar to individual income, indicating that within-household smoothing is not very effective at mitigating business cycle fluctuations in skewness. Third, government tax and transfer programs blunt some of the largest declines in incomes, reducing procyclical fluctuations in skewness, especially in Germany and Sweden. The resulting welfare gain—through the lens of a structural model—amounts to 1.3% in consumption-equivalent terms for Sweden (for which we are able to perform this calculation). However, the remaining risk (in household disposable income) is still substantial: households are willing to pay 4.6% of their consumption to completely eliminate procyclical fluctuations in skewness.
Labor Income Risk in Germany Over the Business Cycle [new version coming soon]
with Alexander Ludwig
We develop a novel parametric approach to estimate the relationship between idiosyncratic and aggregate labor income risk. We derive closed form expressions for the variance and skewness of shocks, and achieve identification in a Generalized Method of Moments (GMM) framework. Applying our method to German data, we find that the variance of permanent shocks to gross labor earnings of males increases in recessions because negative log earnings realizations become more likely than positive ones. For household gross labor earnings we find insurance against transitory but not against permanent shocks. Finally, the German tax and transfer system provides insurance against both shocks; after taxes and transfers the cyclicality of household labor earnings risk is gone.
Occupational Switching and Wage Risk [in revision]
The literature on labor income risk treats the wage process as exogenous to workers, with few exceptions. However, observed wage dynamics are the result of both exogenous factors, such as productivity shocks, and workers‘ choices. Using data from administrative German social security records, I document that the extent of occupational switching upon changing establishments is high, and that the decision to change occupations is of major relevance for realized wage changes. I develop a structural model in which workers optimally choose occupations in response to productivity shocks. This choice then also affects their accumulation of human capital, which is imperfectly transferable across occupations. The observed productivity changes of workers differ from the underlying productivity shocks. This distinction allows me to use the model to (i) identify the role of occupational switching choices for productivity changes and (ii) to quantify the utility gain from the option of occupational switching. The model is calibrated to be consistent with the documented facts. In the calibrated model, the endogenous choice of occupations accounts for 26% of the dispersion of idiosyncratic productivity changes after controlling for human capital changes. The utility gain from the availability of switching occupations corresponds to about 0.78% of per-period consumption for the average worker (with linear utility).
Work in Progress
Higher-Order Wage and Hours Dynamics over the Life Cycle: Evidence from France and Germany
with Priscilla Fialho and Fatih Guvenen
The Macroeconomic and Distributional Effects of the 2015-? German Immigration Wave
with Daniel Harenberg, Dirk Krueger, and Alexander Ludwig
Labor Market Transitions in a Sectoral Business Cycle Model
with Helge Braun and Peter Funk