Time-Varying Risk Premia, Labor Market Dynamics, and Income Risk

Maarten Meeuwis, Dimitris Papanikolaou, Jonathan Rothbaum and Lawrence D.W. Schmidt

No 31968, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that time variation in risk premia leads to time-varying idiosyncratic income risk for workers. Using US administrative data on worker earnings, we show that increases in risk premia lead to lower earnings for low-wage workers; these declines are primarily driven by job separations. By contrast, productivity shocks affect the earnings mainly of highly paid workers. We build an equilibrium model of labor market search that quantitatively replicates these facts. The model generates endogenous time-varying income risk in response to changes in risk premia and matches several stylized features of the data regarding unemployment and income risk over the business cycle.

JEL-codes: E3 E40 G1 J20 J30 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-lma, nep-mac, nep-rmg and nep-upt
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