Skewed Idiosyncratic Income Risk over the Business Cycle: Sources and Insurance
with David Domeij, Fatih Guvenen, and Rocio Madera
American Economic Journal: Macroeconomics Vol. 14(2), Apr 2022, pp. 207–242
See column on VoxEU
Show Abstract We provide new evidence on business cycle fluctuations in skewed labor income risk in the United States, Germany, Sweden, and France. We document four results. First, in all countries, the skewness of individual income growth is strongly procyclical, whereas its variance is flat and acyclical. Second, this result also holds for continuously employed, full-time workers, 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

Higher-Order Income Risk Over the Business Cycle (new version) [Appendix]
with Alexander Ludwig
R&R @ International Economic Review
Show Abstract We explore the consequences of higher-order risk (left-skewness and excess kurtosis of idiosyncratic income risk) in a standard incomplete-markets life-cycle model. We calibrate the model using a canonical income process with persistent and transitory risk, extended to feature cyclical shock distributions with left-skewness and excess kurtosis. We estimate this income process by GMM for US household data, and find shocks to be highly leptokurtic, with countercyclical variance and procyclical skewness of persistent shocks. Our quantitative exercise shows that, 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, the existence of this higher-order risk 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.

Stage-Based Identification of Policy Effects—draft coming soon!
with Christian Alemán, Alexander Ludwig, and Raül Santaeulalia-Llopis
Show Abstract We develop a method that identifies the effects of policy implemented nationwide across all regions at the same time. Our method consists of a normalization that maps the time-paths of regional outcomes onto a reference path—using only pre-policy data. After normalization, the normalized pre-policy outcome paths are identical—up to a minimization error. The stage of a regional outcome is defined as its location on (the support of) the reference path. Since regions can differ by stage at any point in time, our normalization uncovers heterogeneity in the stage at the time of policy implementation—even when implementation occurs at the same time across regions. We use this stage variation to identify the policy effects: a stage-leading region delivers the counterfactual path inside a window in which non-leading regions are subject to the policy whereas the leading region is not.

Selected Work in Progress

Income Dynamics of Couples: Correlated Risks and Heterogeneous Within-Household Insurance
with Rocio Madera and Fane Groes

The Insurance Value of Public Insurance Against Idiosyncratic Income Risk
with Rocio Madera

Dual Labor Markets, Unemployment, and Career Mobility
with Ismael Gálvez, Eugenia González-Aguado, and Ludo Visschers

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