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Understanding Higher-Order Moments in Earnings Dynamics: A Search-Theoretic Approach

Serdar Ozkan (), Fatih Karahan () and Sam Kapon
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Sam Kapon: Federal Reserve Bank of New York

No 1597, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Recently, Guvenen et al. (2014) have shown that the distribution of earnings changes display large excess kurtosis and negative skewness. In particular, most workers experience little changes to their annual earnings, whereas a small group experience very large fluctuations. Moreover, experiencing large earnings declines is more likely than seeing big positive earnings growth. Importantly, both of these features comove with age and income: earnings changes tend to become more negatively skewed and leptokurtic with age and income. In this paper we investigate the role of search friction in explaining the higher-order moments of earnings growth. More specifically, we quantify the relative importance of search frictions, productivity risk and heterogeneity in shaping idiosyncratic earnings risk over the working life, and in particular their relative contributions to higher-order moments. To that end, we estimate an equilibrium job search model featuring employer competition and use it as a measurement device.

Date: 2016
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More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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