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Discussion Paper Details

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Title: Dissecting Idiosyncratic Earnings Risk

Author(s): Elin Halvorsen, Hans Holter, Serdar Ozkan and Kjetil Storesletten

Publication Date: October 2020

Keyword(s): Earnings Dynamics, Higher-order earnings risk, Hours, Income Shocks, Insurance, Kurtosis, Skewness and wages

Programme Area(s): Macroeconomics and Growth

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 negative changes to hours are transitory and 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 close to symmetric and less leptokurtic.

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Bibliographic Reference

Halvorsen, E, Holter, H, Ozkan, S and Storesletten, K. 2020. 'Dissecting Idiosyncratic Earnings Risk'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15395