Asymmetric Business-Cycle Risk and Social Insurance

David Domeij, Fatih Guvenen, Rocio Madera and Christopher Busch

No 1031, Working Papers from Barcelona School of Economics

Abstract: This paper studies the business-cycle variation in higher-order (labor) income risk-that is, risks that are captured by moments higher than the variance of income changes. We examine the extent to which such risks can be smoothed within households or with government social insurance and tax policies. We use panel data from three countries that differ in many aspects relevant for our analysis: the United States, Germany, and Sweden. Our analysis has three main results. First, analyzing individual gross labor income, we document that skewness is procyclical and dispersion (variance) is flat and acyclical in Germany and Sweden, as was previously documented for the United States. The same patterns hold true for groups defined by education, gender, occupation, and public- versus private-sector jobs. Second, within-household smoothing appears to be not effective at mitigating business cycle fluctuations in skewness, and household- level income displays cyclical patterns that are very similar to individual income. Third, government tax and transfer programs blunt some of the largest declines in incomes, reducing procyclical fluctuations in skewness. The resulting welfare gain-through the lens of a structural model-amounts to 1.3% in consumption- equivalent terms for Sweden (for which we are able to perform this calculation). However, the remaining risk (in household disposable income) is still substantial: households are willing to pay 4.6% of their consumption to completely eliminate procyclical fluctuations in skewness.

Keywords: Business cycles; idiosyncratic income risk; countercyclical risk; procyclical skewness; social insurance policy (search for similar items in EconPapers)
JEL-codes: D31 E24 E32 H31 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-lma and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Working Paper: Asymmetric Business-Cycle Risk and Social Insurance (2018)
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