Asymmetric Business Cycle Risk and Social Insurance
with Chris Busch, David Domeij, and Fatih Guvenen
This paper studies the business-cycle variation in higher-order (labor) income risk—that is, risks that are captured by moments higher than the variance. We examine the extent to which such risks can be smoothed within households or with government social insurance and tax policies. We use panel data from three countries that differ in many aspects relevant for our analysis: the United States, Germany, and Sweden. Our analysis has three main results. First, using individual gross income, we document that skewness is procyclical and dispersion (variance) is flat and acyclical in Germany and Sweden, as was previously documented for the United States. The same patterns hold true for groups defined by education, gender, public- versus private-sector jobs, among others. Second, household-level income displays cyclical patterns that are very similar to individual income, indicating that smoothing is not very effective at mitigating business cycle fluctuations in skewness. Third, government tax and transfer programs blunt some of the largest declines in incomes, mitigating the business-cycle fluctuations in skewness, especially in Germany and Sweden. The resulting welfare gain—through the lens of a structural model—amounts to 1.3% in consumption-equivalent terms for Sweden (for which we are able to perform this calculation). However, the remaining risk (in post-government household-level income) is still substantial: households are willing to pay 4.6% of their consumption to completely eliminate procyclical fluctuations in skewness.
Income Contingent University Loans: Policy Design and an Application to Spain
with Antonio Cabrales, Maia Güell, and Analia Viola
In Europe, the need for additional funding coming from either budget cuts and/or increased costs due to increased competition has reopened the debate on the financing of university systems. An attractive alternative to the current general-tax-financed subsidies are Income Contingent Loans (ICL), a flexible scheme that puts more weight on private resources while enhancing progressivity. One challenge of the viability of ICL systems is the functioning of the labor market for university graduates. This paper offers a general analysis of the economics of ICL, followed by an application to Spain. We set up a loan laboratory in which we can explore the distributional effects of different loan systems to finance tertiary education at current costs as well as to increase university funding to improve in its quality. We use simulated lifetime earnings of graduates matching the dynamics of employment and earnings in the Spanish administrative social security data to calculate the burden of introducing ICL for individuals at different points of the earnings distribution and for the government. We find that (1) our proposed structure is highly progressive under all specifications, with the top quarter of the distribution paying close to the full amount of the tuition and the bottom 10\% paying almost no tuition; and (2) the share of total university education subsidized by the government is between 16 and 56 percentage points less than under the current system.
Consumption and Tail Earnings Shocks - Under review
This paper characterizes the joint dynamics of earnings and consumption changes focusing on the tails of the distribution, motivated by new evidence that emphasizes the role of extreme earnings changes. In particular, this paper makes the following contributions. (i) I first propose an empirical method to discipline the outliers in survey data sampling using publicly available moments from administrative sources. (ii) I then apply this method to the PSID to study the distribution of household disposable income and consumption, two measures that are not available in the U.S. social security data. An important result is that the empirical relation between earnings and consumption changes is highly non-linear, with extreme events correlating strongly with durable consumption adjustments and less so with non-durable expenditures. (iii) I build a life-cycle, incomplete markets model with lumpy durable consumption and non-gaussian earnings shocks. I estimate the model to capture the higher-order moments of earnings and consumption at the micro level. The behavior of lumpy durables is crucial to rationalize the empirical findings in the event of non-gaussian shocks. (iv) I use the model to calculate the structural consumption response to extreme shocks and to understand the implications for the degree of self-insurance against higher-order income risk, the welfare cost of incomplete markets, and aggregate consumption dynamics.
SELECTED WORK IN PROGRESS
Income Dynamics in Dual Labor Markets
with Antonio Cabrales and Maia Güell
In many European countries, labor markets feature both permanent and temporary workers. Do workers that start their careers in temporary contracts have a different fate as compared to those in long-term jobs in terms of the income risk at different points of the lifecycle, that is, in terms of the variance of income and its dynamics? In this paper, we characterize the dynamics of earnings uncertainty for workers that spent most of their early career in temporary – job-unstable – and the rest – job-stable. We use administrative data from Spain and a method of moments to estimate the age profile of the persistence and variance of labor income shocks, separately for both types of workers. We use college-educated males as the benchmark group, in order to isolate other forms of heterogeneity. We find that the job-unstable workers face larger uncertainty, as represented by the variance of permanent shocks, at all ages after the age of 25. This uncertainty is U-shaped for the job-unstable group, while it is mostly decreasing in age for the job-stable group. The persistence of shocks is hump-shaped for both groups, peaking around the mid-career years at 0.95, but it is on average higher for the job-unstable group (0.85 as compared to 0.75).
The Self-Employment Option: An Empirical Investigation in Rigid Labor Markets
with Joaquin Garcia-Cabo
This paper analyzes the determinants of becoming self-employed using Spanish Social Security data. We use a large panel of workers’ histories for the last three decades to characterize the dynamics of the transitions into self-employment and study the characteristics of workers that enter self-employment, with an emphasis on entry during recessions and expansions. The Spanish case is of particular interest given the high unemployment levels – often associated to a combination of strong unions and high firing costs – and its two-tier structure, which features many of the current challenges brought up by the gig economy in many other countries. We show that, in contrast to current evidence from other countries, the decision to become self-employed is pro- cyclical. We then use variation across sectors and occupations to understand the nature of this result, as well as the role of high unemployment insurance and pervasiveness of temporary contracts.
Using the Timing of Durable Purchases to Measure Income Risk
with Laura Sunder-Plassmann
We use register income data for Danish households, linked to administrative data on houses and car purchases, and a structural model to disentangle what share of long-run income changes are predictable, insurable, and what is uncertain to the household.
Last update: May 2018.