Dissecting Idiosyncratic Income Risk

Elin Halvorsen, Hans Holter, Kjetil Storesletten and Serdar Ozkan
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Elin Halvorsen: Statistics Norway

No 1337, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Recent income dynamics literature has documented strong non-Gaussian features for annual earnings risk. In this paper, using the Norwegian Registry Data we investigate the sources of these nonnormalities as well as whether they are also present in household before- and after- tax income dynamics. We first show that individual earnings growth in Norway, similar to the U.S., is strongly left skewed and leptokurtic. Interestingly, the variation in the extent of these nonnormalities over the life-cycle and between income groups are almost identical between these two economies. We next investigate wage and hours components of earnings growth and find that wage changes are also left-skewed and leptokurtic with magnitudes and patterns similar to those of earnings growth. Furthermore, large earnings changes are mostly driven by changes in wages for high-earners, but the split between wages and hours is more equal for workers with low earnings. By decomposing the higher order moments of earnings growth into its wage and hours components, we find that the shape of their joint distribution is at least as important as the nonnormalities in the marginal distributions of wage and hours growth. Finally, we study how much spousal income and taxes and transfers provide insurance against long tails of earnings growth. We first find that spouses do not change their earnings as a response to changes in their husbands income. Second, redistributive Norwegian public insurance system reduces household income risk significantly but much more so for low-income families. Thus, we find a less pronounced left skewness and excess kurtosis in the household disposable income growth distribution.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1337

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