DP15395 Dissecting Idiosyncratic Earnings Risk

Author(s): Elin Halvorsen, Hans Holter, Serdar Ozkan, Kjetil Storesletten
Publication Date: October 2020
Keyword(s): Earnings Dynamics, Higher-order earnings risk, Hours, Income Shocks, Insurance, Kurtosis, Skewness, wages
JEL(s): E24, H24, J24, J31
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15395

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.