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Atlantic Economic Journal

, Volume 43, Issue 2, pp 229–245 | Cite as

Earnings Volatility Trends and the Great Moderation: A Multifactor Residual Approach

  • Andre R. NeveuEmail author
Article
  • 108 Downloads

Abstract

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.

Keywords

Income volatility PSID Great moderation Multifactor residual Labor earnings 

JEL

E32 J11 

Notes

Acknowledgments

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.

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Copyright information

© International Atlantic Economic Society 2015

Authors and Affiliations

  1. 1.James Madison UniversityHarrisonburgUSA

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