Economics

What is causing income risk?

Understanding Income Risk: New Insights from Big Data

This is a great piece of research using big data to look at income risk. While income inequality is a focus of mine, I find this piece of research on risk particularly interesting because the uncertainty consumers face about their incomes are real. It might be difficult to measure, but it is intuitive that income uncertainty can place a great deal of stress on ourselves, friends, and families. Thus, any way to help alleviate this stress would be beneficial economically and socially.

Possibly the most interesting finding in this paper is that the year to year variation of income is stable during recessions.

vol of income

Now, it is clear there is an increase in volatility of earnings during a recession (see the red line jump up during the grey recessions). But this is less volatile than I expected to see.

As this is a great paper, this is explained by skewness. For instance, during recessions we see the likelihood of large drops in income increase relative to increases in income. The chart below shows this. The closer the skewness is to -1, the higher the likelihood of income drops.

income skewness

Another great finding is that the highest and lowest earners typically face the largest income declines in a recession.

loss of income in recession

I want to make a few comments on this finding. First off, across all four recessions, it is interesting to see that the lowest income earners are less affected than those in the percentiles above them. This is relatively intuitive as the lowest income earners are minimum wage earners.

It is also interesting that from the 20th to about 90th percentile, change in income is much more stable relative to the 10th and 90th percentiles. I reconcile this with the deduction that the highest earners are paid a larger bonus based on firm performance, while the lowest workers are more disposable. The large group in the middle receives smaller bonuses and has stable jobs.

 

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