Dissecting Idiosyncratic Earnings Risk

86 Pages Posted: 22 Sep 2022

See all articles by Elin Halvorsen

Elin Halvorsen

Statistics Norway - Research Department; University of Oslo - Department of Economics

Hans Holter

University of Delaware; University of Oslo; Nova School of Business and Economics

Serdar Ozkan

University of Toronto

Kjetil Storesletten

University of Minnesota

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2022

Abstract

This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic.

Keywords: earnings dynamics, income shocks, insurance, wages, hours, higher-order earnings risk, skewness, kurtosis, machine learning

JEL Classification: E24, H24, J24, J31

Suggested Citation

Halvorsen, Elin and Holter, Hans and Ozkan, Serdar and Storesletten, Kjetil, Dissecting Idiosyncratic Earnings Risk (September 1, 2022). FRB St. Louis Working Paper No. 2022-24, Available at SSRN: https://ssrn.com/abstract=4226358 or http://dx.doi.org/10.20955/wp.2022.024

Elin Halvorsen (Contact Author)

Statistics Norway - Research Department ( email )

Akersveien 26
Postboks 2633 St. Hanshaugen
Oslo, Oslo 0131
Norway

University of Oslo - Department of Economics

Norway

Hans Holter

University of Delaware ( email )

Newark, DE 19711
United States

University of Oslo

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

Nova School of Business and Economics

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Serdar Ozkan

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

Kjetil Storesletten

University of Minnesota ( email )

10 University Avenue
Duluth, MN 55810

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