How Do Families Smooth Household Heads' Earnings Volatility?

Abstract

We investigate the extent to which household heads' earnings volatility is translated into household consumption volatility, and, in the process, identify measures of smoothing idiosyncratic earnings variation. Analysis, based on the Korea Labor & Income Panel Study (KLIPS) data, reveals that volatility of heads' earnings is almost entirely smoothed. The most effective measure of smoothing heads' earnings volatility is income from self-employment, with the next most effective being labor income of other family members. Put together, 73 percent of heads' earnings volatility is smoothed by these two measures of Within-family 'income pooling.' Unlike many studies dealing with a similar issue in the United States labor market, government plays virtually no role in smoothing volatility in the Korean labor market. All these observations are still preserved even when we consider various types of endogeneity of earnings' changes. Additional analysis finds that consumption as well as income volatility is countercyclical, even skilled workers experience large earnings volatility, and both hours and wage volatilities are substantial contributors to heads' earnings volatility.