Dissecting Idiosyncratic Earnings Risk

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.

Wage Risk and Government and Spousal Insurance

“…In reality, women's wages are 1 Guvenen, Karahan, Ozkan and Song (2021) document rich dynamics for pre-tax individual earnings in the US, Arellano, Blundell and Bonhomme (2017) for household pre-tax earnings in the US and Norway, De Nardi, Fella and Paz-Pardo (2020) for household disposable earnings in the US. Ozkan, Storesletten, Holter andHalvorsen (2017) andDe Nardi, Fella, Knoef, Paz-Pardo andVan Ooijen (2021) study the relative contribution of wages and hours to male earnings dynamics respectively in Norway, and in the Netherlands and the US. more persistent and thus such a reform would have negative impact on the welfare of a subset of persistently low-income women with high costs of labor market participation (which could be related, for example, to health issues), and would be pushed into low-paid work by the reform.…”