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Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks

Manuel Sanchez () and Felix Wellschmied ()
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Manuel Sanchez: University of Bristol
Felix Wellschmied: Universidad Carlos III de Madrid

No 10925, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: We study workers' idiosyncratic earnings risk over the life-cycle using a German administrative data set. Positive and negative earnings shocks both contain a highly persistent component. The variance and average size of positive persistent shocks is decreasing over the life-cycle. The (absolute) size of negative persistent shocks is increasing. The probability to experience either of these shocks is U-shaped in age; during prime-age it is around 35 percent. Negative transitory shocks are relatively larger and more dispersed than positive transitory shocks. Their size and variance are increasing over the life-cycle. Large persistent positive shocks early in life generate large wealth holdings for the top one percent of workers in an incomplete markets model. Moreover, age-varying risk implies a linear increase in consumption inequality late in working life.

Keywords: life-cycle; earnings risk; wealth dispersion (search for similar items in EconPapers)
JEL-codes: E21 E24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
Date: 2017-07
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