Abstract
We document new facts about risk in male wages and earnings, household earnings, and pre- and post-tax income in the Netherlands and the United States. We find that, in both countries, earnings display important deviations from the typical assumptions of linearity and normality. Individual-level male wage and earnings risk is relatively high at the beginning and end of the working life, and for those in the lower and upper parts of the income distribution. Hours are the main driver of the negative skewness and, to a lesser extent, the high kurtosis of earnings changes. Even though we find no evidence of added-worker effects, the presence of spousal earnings reduces the variability of household income compared to that of male earnings. In the Netherlands, government transfers are a major source of insurance, substantially reducing the standard deviation, negative skewness, and kurtosis of income changes. In the U.S. the role of family insurance is much larger than in the Netherlands. Family and government insurance reduce, but do not eliminate non-linearities in household disposable income by age and previous earnings in either country.
Highlights
Wage risk affects key economic decisions, including consumption, saving, and labor supply, and is an important determinant of household’s welfare
This paper studies the size and distribution of wage shocks and the role of insurance mechanisms against these shocks in the Netherlands and the U.S We start by documenting the distribution of wage shocks at the individual level by analyzing distributional measures of wage changes, including the standard deviation, skewness, kurtosis, and persistence, by age and previous earnings
The various moments show that, in the Netherlands, labor supply does not have a large effect on the standard deviation of wage changes
Summary
Wage risk affects key economic decisions, including consumption, saving, and labor supply, and is an important determinant of household’s welfare. Very importantly, the IPO data set contains a detailed decomposition of labor and asset income, taxes and social insurance premia paid, and government transfers received for all household members. To confirm that the results are not driven by the different time periods for the U.S and the Netherlands (see Heathcote, Perri and Violante, 2010 for a discussion of changes in the distribution of wages and earnings in the U.S across this period of time), we study our statistics of interest for the period after 1997 for two-years income changes in both countries This robustness check shows that the cross-country differences that we document come from different cross-country features and not from comparing different sample periods.
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