Working Paper: NBER ID: w31968
Authors: Maarten Meeuwis; Dimitris Papanikolaou; Jonathan L. Rothbaum; Lawrence DW Schmidt
Abstract: We show that time variation in risk premia leads to time-varying idiosyncratic income risk for workers. Using US administrative data on worker earnings, we show that increases in risk premia lead to lower earnings for low-wage workers; these declines are primarily driven by job separations. By contrast, productivity shocks affect the earnings mainly of highly paid workers. We build an equilibrium model of labor market search that quantitatively replicates these facts. The model generates endogenous time-varying income risk in response to changes in risk premia and matches several stylized features of the data regarding unemployment and income risk over the business cycle.
Keywords: risk premia; labor market dynamics; income risk; job separations; productivity shocks
JEL Codes: E3; E40; G1; J20; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in risk premia (G19) | declines in worker earnings (J31) |
| increases in risk premia (G19) | job separations (J63) |
| job separations (J63) | declines in worker earnings (J31) |
| increases in risk premia (G19) | increased income risk (E25) |
| increases in risk premia (G19) | higher job loss rates (J63) |
| sensitivity of worker earnings to risk premium shocks (J39) | greater for younger and low-tenure workers (J39) |
| transitory increases in risk premia (G19) | long-term earnings losses (J17) |