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Cyclical income risk in Great Britain

Konstantinos Angelopoulos, Spyridon Lazarakis and Jim Malley ()

No 7594, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper establishes new evidence on the cyclical behaviour of household income risk in Great Britain and assesses the role of social insurance policy in mitigating against this risk. We address these issues using the British Household Panel Survey (1991-2008) by decomposing stochastic idiosyncratic income into its transitory, persistent and fixed components. We then estimate how income risk, measured by the variance and the skewness of the probability distribution of shocks to the persistent component, varies between expansions and contractions of the aggregate economy. We first find that the volatility and left-skewness of these shocks is a-cyclical and counter-cyclical respectively. The latter implies a higher probability of receiving large negative income shocks in contractions. We also find that while social insurance (tax-benefits) policy reduces the levels of both measures of risk as well as the counter-cyclicality of the asymmetry measure, the mitigation effects work mainly via benefits.

Keywords: household income risk; social insurance policy; aggregate fluctuations (search for similar items in EconPapers)
JEL-codes: D31 E24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur, nep-ias, nep-lma, nep-mac and nep-rmg
Date: 2019
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