The Passthrough of the Business Cycle to Labor Income

Fabio Braggion, Giuseppe Floccari and Jens Kvaerner

No 20074, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We estimate firms’ business cycle passthrough—the extent to which they transmit economic fluctuations to workers’ labor income. Differences in passthrough explain most variation in workers’ systematic income risk: those with higher permanent income, middle-aged workers, and those on permanent contracts experience lower passthrough. Changes in hours, rather than wages, drive this variation, and passthrough is lower in recessions than in expansions. Workers recognize their passthrough, which is reflected in financial decisions. Our findings highlight how firm-worker risk-sharing leads to unequal effects of business cycle fluctuations across workers and influences household financial choices.

Keywords: Income; risk (search for similar items in EconPapers)
JEL-codes: D14 D31 E21 E32 G11 G5 (search for similar items in EconPapers)
Date: 2025-03
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