Skewed Idiosyncratic Income Risk over the Business Cycle: Sources and Insurance

David Domeij, Fatih Guvenen, Rocio Madera and Christopher Busch

No 1180, Working Papers from Barcelona School of Economics

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.

Keywords: idiosyncratic income risk; countercyclical risk; skewness (search for similar items in EconPapers)
JEL-codes: D31 E24 E32 H31 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ias, nep-lma, nep-mac and nep-rmg
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Citations: View citations in EconPapers (6)

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Journal Article: Skewed Idiosyncratic Income Risk over the Business Cycle: Sources and Insurance (2022)
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