Earnings Volatility Trends and the Great Moderation: A Multifactor Residual Approach
- 108 Downloads
To explore trends in idiosyncratic income volatility, this paper employs a multifactor residual model to extract macroeconomic factors from individual changes in wages and total family income. The data used in this analysis is a subset of the persistently employed from the Panel Survey of Income Dynamics (PSID). Using this subset expands the income volatility literature by bridging an existing gap between studies using the PSID and others using a continuous work history sample. Improved aggregate economic conditions can explain much of the reduction in unconditional income volatility that took place during the Great Moderation, lasting from the mid-1980s into the 2000s. However, macro factors appear to be making larger contributions to individual and household income volatility following the recent rise in GDP volatility. In contrast, idiosyncratic volatility of income, that which remains after accounting for macroeconomic factors, has generally remained consistent. The stability of idiosyncratic income volatility suggests employment changes in the recent crisis were cyclical rather than structural.
KeywordsIncome volatility PSID Great moderation Multifactor residual Labor earnings
The author would like to thank Vipul Bhatt, Sangeeta Pratap, Molly Sherlock, and Merih Uctum for their helpful comments. The author would also like to thank the Battle Family Endowment for Faculty Support and the James Madison University College of Business for helping facilitate this research grant.
- Comin, D., & Phillipon, T. (2006). The rise in firm-level volatility: causes and consequences. NBER Macroeconomics Annual, 2005(20), 167–228.Google Scholar
- Congressional Budget Office. (2008). Recent trends in the variability of individual earnings and household income (pp. 1–32). Washington: Congressional Budget Office.Google Scholar
- Gosselin, P., & Zimmerman, S. (2008). Trends in income volatility and risk, 1970–2004. Urban Institute Working Paper, May. Washington, DC: The Urban Institute, 1–38.Google Scholar
- Gottschalk, P., & Moffitt, R. (1994) The growth of earnings instability in the U.S. labor market. Brookings Papers on Economic Activity, (2), 217–272.Google Scholar
- Moffitt, R., & Gottschalk, P. (2011). Trends in the transitory variance of male earnings in the U.S., 1970–2004. NBER Working Paper Number 16833, Feb. Cambridge, MA: National Bureau of Economic Research, 1–57.Google Scholar
- Nichols, A., & Zimmerman, S. (2008). Measuring trends in income variability (pp. 1–58). Washington: The Urban Institute.Google Scholar
- Sabelhaus, J., & Song, J. (2009). Earnings volatility across groups and time. National Tax Journal, 42(2), 347–364.Google Scholar
- Stock, J. H., & Watson, M. W. (2002). Has the business cycle changed and why? NBER Macroeconomics Annual, 2002(17), 159–230.Google Scholar
- Summers, P.M. (2005). What caused the great moderation? some cross-country evidence. Economic Review: Federal Reserve Bank of Kansas City, Third Quarter, 5–32.Google Scholar