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Report
How Do Households Respond to Income Shocks?
We use panel data from the Italian Survey of Household Income and Wealth from 1991 to 2016 to document empirically what components of the household budget constraint change in response to shocks to household labor income, both over shorter and over longer horizons. We show that shocks to labor income are associated with negligible changes in transfers and non-labor income components, modest changes in consumption expenditures, and large changes in wealth. We then split the sample in households which do not own business or real estate wealth, and households who do. For the first group, we find ...
Journal Article
Econ Focus: Adjusting to Income Risk
A common question in economics and finance is how households respond to changes in income risk. Theory predicts that when households' incomes become more volatile, they may save more, work more, or reduce their holdings of risky assets to compensate for their increased risk.In a recent article in the Review of Economic Dynamics, Marios Karabarbounis of the Richmond Fed, Yongsung Chang and Jay Hong of Seoul National University, Yicheng Wang of Peking University, and Tao Zhang of the Ragnar Frisch Centre for Economic Research examined how households adjust their financial portfolio in response ...
Working Paper
The Causes of Household Bankruptcy: The Interaction of Income Shocks and Balance Sheets
We examine how household balance sheets and income statements interact to affect bankruptcy decisions following an exogenous income shock. For identification, we exploit government payments in one but not any other Canadian province that varied exogenously based on family size. Receiving a larger income shock from the payment (relative to household income) reduces the count of bankruptcies, with fewer remaining filers having higher net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone). Receiving an income shock thus causes households that would ...
Discussion Paper
Understanding Permanent and Temporary Income Shocks
The earnings of 200 million U.S. workers change each year for various reasons. Some of these changes are anticipated while others are more unexpected. Although many of these changes may be due to pleasant surprises?such as receiving salary raises and promotions?others involve disappointments?such as falling into unemployment. Arguably, some of these factors have rather short-lived effects on an individual?s earnings, whereas others may have permanent effects. Many labor economists have been interested in these various shocks to earnings. How big are the more permanent shocks to earnings? How ...
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...
Working Paper
Response of Consumer Debt to Income Shocks: The Case of Energy Booms and Busts
This paper investigates how consumers respond to local income shocks as a result of booms and busts in oil and gas development. Oil and gas development generates potentially large streams of income via wages and salaries to workers and royalty income to mineral rights owners. Changes in development may lead consumers to increase their spending depending on their exposure to income shocks. Using quarterly information on consumer debt and oil and gas activity, I ?nd that consumer debt increased at a peak of $840 per capita in counties with shale endowment and increased drilling. Each well ...
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...
Working Paper
Rational but Not Prescient: Borrowing during the Fracking Boom
To study how income expectations affect borrowing, we use leased natural gas rights in Texas in the mid-2000s, which created potential for future leaseholder income without loosening credit constraints. In matching 11,000 leaseholders with non-leaseholders selected from a screened pool of 5.2 million, we find that the average leaseholder borrowed $13,000 more over the 2003–08 leasing boom. A consumption-smoothing modelindicates that leaseholders’ income expectations aligned with forecasts of persistently high natural gas prices. Yet, the unforeseeable success of fracking was associated ...
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...