The Nature of Countercyclical Income Risk

59 Pages Posted: 4 May 2012 Last revised: 12 Oct 2015

See all articles by Fatih Guvenen

Fatih Guvenen

University of Minnesota - Department of Economics; National Bureau of Economic Research (NBER)

Serdar Ozkan

Board of Governors of the Federal Reserve System

Jae Song

U.S. Social Security Administration

Multiple version iconThere are 2 versions of this paper

Date Written: May 2012

Abstract

This paper studies the cyclical nature of individual income risk using a confidential dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual income growth during recessions into "between-group" and "within-group" components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic income shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses--large upward income movements become less likely--whereas the bottom end expands--large drops in income become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics--the average income of an individual at the beginning of a business cycle episode--proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (which is not the case during expansions). Finally, we find that the cyclical nature of income risk is dramatically different for the top 1 percent compared with all other individuals--even relative to those in the top 2 to 5 percent.

Suggested Citation

Guvenen, Fatih and Ozkan, Serdar and Song, Jae, The Nature of Countercyclical Income Risk (May 2012). NBER Working Paper No. w18035. Available at SSRN: https://ssrn.com/abstract=2050826

Fatih Guvenen (Contact Author)

University of Minnesota - Department of Economics ( email )

Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Serdar Ozkan

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jae Song

U.S. Social Security Administration ( email )

Washington, DC 20254
United States
202-358-6403 (Phone)
202-358-6192 (Fax)

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