Abstract
SummaryThis paper provides new evidence on the cyclical behaviour of household labour income risk in Great Britain and the role of social insurance policy in mitigating against this source of income risk. To achieve this, we decompose stochastic idiosyncratic household income into its transitory and persistent components. We focus our analysis of income risk captured by the second to fourth moments of the probability distribution of shocks to the persistent component of income. We find that household labour income risk increases during contractions via changes in third and fourth central moments of persistent shocks to labour income, whereas the variance remains acyclical. We also find that economic policy has reduced the level of risk exposure and its increase during contractions via benefits rather than tax policies.
Highlights
The cyclical behaviour of labour income risk and the extent to which risk exposure increases during periods of contraction have significant implications for household welfare and economic policy
Using data from the British Household Panel Survey (BHPS) (1991–2008) and a parametric econometric approach, which allowed us to exploit the history dependence of cross-sectional moments, this paper provided new evidence on the cyclical behaviour of household labour income risk in Great Britain (GB)
We assessed the role of social insurance policy in mitigating this source of income risk
Summary
This paper provides new evidence on the cyclical behaviour of household labour income risk in Great Britain and the role of social insurance policy in mitigating against this source of income risk. We decompose stochastic idiosyncratic household income into its transitory and persistent components. We focus our analysis of income risk captured by the second to fourth moments of the probability distribution of shocks to the persistent component of income. We find that household labour income risk increases during contractions via changes in third and fourth central moments of persistent shocks to labour income, whereas the variance remains acyclical. We find that economic policy has reduced the level of risk exposure and its increase during contractions via benefits rather than tax policies
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