Asymmetric Business-Cycle Risk and Social Insurance

73 Pages Posted: 7 May 2018

See all articles by Christopher Busch

Christopher Busch

Autonomous University of Barcelona - MOVE (Markets, Organizations and Votes in Economics)

Fatih Guvenen

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

David Domeij

Stockholm School of Economics - Department of Economics

Rocio Madera

Southern Methodist University (SMU) - Economics Department

Date Written: May 2018

Abstract

This paper studies the business-cycle variation in higher-order (labor) income risk—that is, risks that are captured by moments higher than the variance. We examine the extent to which such risks can be smoothed within households or with government social insurance and tax policies. We use panel data from three countries that differ in many aspects relevant for our analysis: the United States, Germany, and Sweden. Our analysis has three main results. First, using individual gross income, we document that skewness is procyclical and dispersion (variance) is flat and acyclical in Germany and Sweden, as was previously documented for the United States. The same patterns hold true for groups defined by education, gender, public- versus private-sector jobs, among others. Second, household-level income displays cyclical patterns that are very similar to individual income, indicating that within-household smoothing is not very effective at mitigating business cycle fluctuations in skewness. Third, government tax and transfer programs blunt some of the largest declines in incomes, reducing procyclical fluctuations in skewness, especially in Germany and Sweden. The resulting welfare gain—through the lens of a structural model—amounts to 1.3% in consumption-equivalent terms for Sweden (for which we are able to perform this calculation). However, the remaining risk (in household disposable income) is still substantial: households are willing to pay 4.6% of their consumption to completely eliminate procyclical fluctuations in skewness.

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Suggested Citation

Busch, Christopher and Guvenen, Fatih and Domeij, David and Madera, Rocio, Asymmetric Business-Cycle Risk and Social Insurance (May 2018). NBER Working Paper No. w24569. Available at SSRN: https://ssrn.com/abstract=3174501

Christopher Busch (Contact Author)

Autonomous University of Barcelona - MOVE (Markets, Organizations and Votes in Economics) ( email )

Campus de Bellaterra-UAB Edifici B (s/n)
EDIFICI B
Cerdanyola del Vallès
, Barcelona 08193
Spain

Fatih Guvenen

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

David Domeij

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
46 8 736 9215 (Phone)
46 8 313 207 (Fax)

Rocio Madera

Southern Methodist University (SMU) - Economics Department ( email )

United States

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