Skewed Idiosyncratic Income Risk over the Business Cycle: Sources and Insurance
with David Domeij, Fatih Guvenen, and Rocio Madera
forthcoming @ American Economic Journal: Macroeconomics
See column on VoxEU
Show Abstract Recent studies have shown that idiosyncratic labor income risk becomes more left-skewed during recessions. This procyclical skewness arises from a combination of higher downside risk and lower chances of upward surprises during recessions. While this much is known, some important open questions remain. For example, how robust are these patterns across countries that differ in their institutions and policies, as well as across genders, education groups, and occupations, among others? What is the contribution of wages versus hours to procyclical skewness of earnings changes? To what extent can skewness fluctuations in individual earnings be smoothed within households or with government policies? Using panel data from the United States, Germany, Sweden, and France, we find four main results. First, the skewness of individual income growth (before-tax/transfer) is procyclical while its variance is flat and acyclical in all three countries. Second, this result holds even for full-time workers continuously employed in the same establishment, indicating that the hours margin is not the main driver; additional analyses of hours and wages confirm that both margins are important. Third, within-household smoothing does not seem effective at mitigating skewness fluctuations. Fourth, tax-and-transfer policies blunt some of the largest declines in incomes, reducing procyclical fluctuations in skewness.

Should Germany Have Built a New Wall? Macroeconomic Lessons from the 2015-18 Refugee Wave [Online Appendix]
with Dirk Krueger, Alexander Ludwig, Irina Popova, and Zainab Iftikhar
Journal of Monetary Economics Vol. 113, Aug 2020, pp. 28–55
Show Abstract In 2015-2016 Germany experienced a wave of predominantly low-skilled refugee immigration. We evaluate its macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign born and native workers. Workers are modelled as imperfect substitutes in aggregate production leading to endogenous wage differentials. We simulate the dynamic effects of this refugee wave, with specific focus on the welfare impact on low skilled natives. Our results indicate that the small losses this group suffers can be compensated by welfare gains of other parts of the native population.

Working Papers

Evaluating the Effectiveness of Policies Against a Pandemic
with Christian Aleman, Alexander Ludwig, and Raül Santaeulalia-Llopis
Show Abstract We develop a novel empirical approach to identify the effectiveness of policies against a pandemic. The essence of our approach is the insight that epidemic dynamics are best tracked over stages, rather than over time. We use a normalization procedure that makes pre-policy paths of the epidemic identical across regions. The procedure uncovers regional variation in the stage of the epidemic at the time of policy implementation. This variation delivers clean identification of the policy effect based on the epidemic path of a leading region that serves as a counterfactual for other regions. We apply our method to evaluate the effectiveness of the nationwide stay-home policy enacted in Spain against the Covid-19 pandemic. We find that the policy saved 15.9% of lives relative to the number of deaths that would have occurred had it not been for the policy intervention. Its effectiveness evolves with the epidemic and is larger when implemented at earlier stages.

Higher-Order Income Risk Over the Business Cycle
with Alexander Ludwig
Show Abstract We extend the canonical income process with persistent and transitory risk to cyclical shock distributions with left-skewness and excess kurtosis. We estimate our income process by GMM for US household data. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The tax and transfer system reduces dispersion and left-skewness. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend on risk attitudes; second, it matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, it has non-trivial implications for self-insurance against shocks.

Occupational Switching, Tasks, and Wage Dynamics
Show Abstract 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 jobs is high, and that the choice to change occupations is of major relevance for realized wage changes. I develop a structural model in which workers optimally switch occupations in response to idiosyncratic productivity shocks. In the model, switching occupations entails a cost, because workers can only imperfectly transfer human capital. The degree of transferability depends on the distance in the task space. Disentangling the role of choices and shocks, I find that the endogenous choice of occupations accounts for 26% of the dispersion of wage changes after controlling for human capital changes.

Selected Work in Progress

Assortative Mating and Income Dynamics of Couples
with Rocio Madera and Fane Groes

Higher-Order Wage and Hours Dynamics over the Life Cycle: Evidence from France and Germany
with Priscilla Fialho and Fatih Guvenen