Abstract
We study the volatility of sources of individual and household level income in the UK in the years 2009-2017, following the Great Recession and government austerity. We find that the volatility of (pre-tax) earnings and disposable income has fallen for the working-age in this period, largely due to fewer negative and large earnings shocks. For older individuals, we also find a fall in the volatility of private income, mainly due to fewer positive and large income shocks. Taxes and transfers help stabilise incomes, with social security cash benefits and income-dependent refundable tax credits reducing household private income volatility by around a quarter for the working age, and 40 percent for those aged 60 or over. However, over the sample period, taxes and benefits became less well correlated with earnings, reducing their ability to counteract swings in labour income. The findings illustrate the consequences of fiscal retrenchment and the cut-backs to welfare benefits on the stability of incomes.
Highlights
The amount of risk and uncertainty faced by individuals and households is an important economic question both for understanding individual economic behaviours and for the welfare consequences
The literature on the UK focuses on years prior to 2009 (Dickens 2000; Blundell and Etheridge 2010; Jenkins and Cappellari 2014; Jenkins 2011; Ramos 2003; Blundell and Preston 1998), and so this is the first paper to examine the income volatility in the UK for the years following the Great Recession
The period we study in this paper, 2009–2017, includes most of the strongest economic downturn in the post-war era -the Great Recession of 2008–2012, as well as the subsequent economic recovery (2012–2017)
Summary
The amount of risk and uncertainty faced by individuals and households is an important economic question both for understanding individual economic behaviours and for the welfare consequences. While most of the existing literature looks at instability or volatility in earnings amongst continuously-employed workers (see, for example, Moffitt and Zhang (2018) and references therein), we include in our analysis individuals with no earnings We contribute to the literature on income volatility by showing how instability changes when we move from individual- to household-level concepts of earnings or income, something which is informative about the extent to which households can pool risk and selfinsure (see, for example, Blundell et al 2015). This is possible because in our survey data all individuals within a household are interviewed.
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