Occupational Switching and Wage Risk
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).
Asymmetric Business Cycle Risk and Government Insurance
with David Domeij, Fatih Guvenen, and Rocio Madera
This paper studies the business cycle variation in higher-order income risk-i.e., risks that are captured by moments higher than the variance. A key focus of our analysis is the extent to which such risks can be smoothed within households or with government social insurance policies. To provide a broad perspective on these questions, we study panel data on individuals and households from the United States, Germany, and Sweden, covering more than three decades of data for each country. We find that the underlying variation in higher-order risk is remarkably similar across these countries that differ in many details of their labor markets. In particular, in all three countries, the variance of earnings changes is almost entirely constant over the business cycle, whereas the skewness of these shocks becomes much more negative in recessions. Government provided insurance, in the form of unemployment insurance, welfare benefits, aid to low income households, and the like, plays a more important role reducing downside risk in all three countries; the effectiveness is weakest in the United States, and most pronounced in Germany. Using a model with partial insurance against income shocks, we calculate that the welfare benefits of stabilizing higher-order income risk over the business cycle through the existing tax and transfer system range from 4% of annual consumption for Germany to 7% for Sweden, when assuming log utility and a modest degree of partial insurance beyond taxes and transfers.
Labor Income Risk in Germany Over the Business Cycle
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.
Work in Progress
Higher-Order Wage and Hours Dynamics over the Life Cycle: Evidence from France and Germany [Draft coming soon!]
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