¶ The Nature of Countercyclical Income Risk

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¶ BibTeX

@article{guvenen2014nature,
  title={The nature of countercyclical income risk},
  author={Guvenen, Fatih and Ozkan, Serdar and Song, Jae},
  journal={Journal of Political Economy},
  volume={122},
  number={3},
  pages={621--660},
  year={2014},
  publisher={University of Chicago Press Chicago, IL}
}

¶ Abstract

We study business cycle variation in individual earnings risk using a confidential and very large data set from the US Social Security Administration. Contrary to past research, we find that the variance of idiosyncratic shocks is not countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical: during recessions, large upward earnings movements become less likely, whereas large drops in earnings become more likely. Second, we find that the fortunes during recessions are predictable by observable characteristics before the recession. Finally, the cyclicality of earnings risk is dramatically different for the top 1 percent compared with the rest of the population.

¶ Excerpts

With these considerations in mind, we settled on the following dates for the last three recessions: 1991–92, 2001–2, and 2008–10. We treat the 1980–83 period as a single recession, given the extremely short duration of the intervening expansion, the anemic growth it brought, and the lack of a significant fall in the unemployment rate. On the basis of this classification, there are three expansions and four recessions during our sample period.