From the Peaks to the Valleys: Cross-State Evidence on Income Volatility over the Business Cycle

Colleen Carey and Stephen H. Shore
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Stephen H. Shore: Georgia State University

The Review of Economics and Statistics, 2013, vol. 95, issue 2, 549-562

Abstract: Countercyclical variation in individuals' idiosyncratic labor income risk could generate substantial welfare costs. Following past research, we infer income volatility—the variance of permanent income shocks, a standard proxy for income risk—from the rate at which cross-sectional variances of income rise over the life cycle for a given cohort. Our novelty lies in exploiting cross-state variation in state economic conditions or state sensitivity to national economic conditions. We find that income volatility is higher in good state times than bad; during good national times, we find volatility is higher in states that are more sensitive to national conditions. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: income volatility; state economic conditions (search for similar items in EconPapers)
JEL-codes: D31 E32 (search for similar items in EconPapers)
Date: 2013
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