Cyclical Labor Income Risk

Nakajima, Makoto; Smirnyagin, Vladimir

doi:https://doi.org/10.21799/frbp.wp.2019.34

Working Paper

Cyclical Labor Income Risk

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 muted, 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.

Keywords: Labor income risk; income inequality; business cycles;

JEL Classification: D31; E24; E32; H31; J31;

https://doi.org/https://doi.org/10.21799/frbp.wp.2019.34