Discussion paper
DP20074 The Passthrough of the Business Cycle to Labor Income
We estimate firms’ business cycle passthrough—the extent to which they transmit economic fluctuations to workers’ labor income. Differences in passthrough explain most variation in workers’ systematic income risk: those with higher permanent income, middle-aged workers, and those on permanent contracts experience lower passthrough. Changes in hours, rather than wages, drive this variation, and passthrough is lower in recessions than in expansions. Workers recognize their passthrough, which is reflected in financial decisions. Our findings highlight how firm-worker risk-sharing leads to unequal effects of business cycle fluctuations across workers and influences household financial choices.
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