The evolution of income volatility

by on January 27, 2009 at 5:19 am in Data Source | Permalink

Shane Jensen and Stephen Shore report:

Recent research has documented a significant rise in the volatility (e.g., expected squared change) of individual incomes in the U.S. since the 1970s. Existing measures of this trend abstract from individual heterogeneity, eff ectively estimating an increase in average volatility. We decompose this increase in average volatility and find that it is far from representative of the experience of most people: there has been no systematic rise in volatility for the vast majority of individuals. The rise in average volatility has been driven almost entirely by a sharp rise in the income volatility of those expected to have the most volatile incomes, identified ex-ante by large income changes in the past. We document that the self-employed and those who self-identify as risk-tolerant are much more likely to have such volatile incomes; these groups have experienced much larger increases in income volatility than the population at large. These results color the policy implications one might draw from the rise in average volatility. While the basic results are apparent from PSID summary statistics, providing a complete characterization of the dynamics of the volatility distribution is a methodological challenge. We resolve these difficulties with a Markovian hierarchical Dirichlet process that builds on work from the non-parametric Bayesian statistics literature.

It is difficult to make the different papers on this topic commensurable, so I would say this is not the final word.  Still, it does raise the possibility that rising income volatility is not as fearful as it at first sounds.  You'll find many other posts on topic by searching for Jacob Hacker posts on this blog and over at Mark Thoma's, among other places.

Jay January 27, 2009 at 6:32 am

So apparently the top 5% of income earners bear much more risk today than they did 30 years ago? Now if we can only convince a certain set of idealogues that there is an inherent trade off between risk and reward.

assman January 27, 2009 at 9:24 am

“So apparently the top 5% of income earners bear much more risk today than they did 30 years ago? Now if we can only convince a certain set of idealogues that there is an inherent trade off between risk and reward.”

Why do you assume that the volatile income earners are also the top 5%?

Jay January 27, 2009 at 12:23 pm

“For all we know, their variation of income has increased only upwards, which would still increase both average income and volatility, but would in fact decreasethe risk these people take.”

Very true. I wish the author had calculated skewness by income.

manya January 28, 2009 at 7:00 pm

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