Household income uncertainties over three decades

Abstract

We study the trend in household income uncertainty using a novel approach that measures income uncertainty at each future horizon as the variance of forecast errors without imposing specific parametric restrictions on the underlying income shocks. We document a widespread increase in household income uncertainty since the early 1970s that is both statistically and economically significant. For example, our measure of near-future uncertainty in total family non-capital income rose about 40% between 1971 and 2002. This rising uncertainty is likely due to the increase in variances of both persistent and transitory income shocks. A parsimoniously calibrated Aiyagari model is solved to illustrate how rising income uncertainty should have affected aggregate saving.