The Cyclicality of Employment Risk

Abstract

We study how idiosyncratic earnings risk evolves over the business cycle in Italy and in the US. We distinguish between two sources of risk to annual earnings growth: changes in employment time (number of weeks of employment within a year) and changes in weekly earnings. Shocks to employment generate the tail distribution of annual earnings growth and account for the increased risk in recessions. In particular, an increase in the rate of separation and a decrease in the rate of hiring are responsible for the skewed annual earnings growth distribution observed in recessions. In contrast, the cross-sectional distribution of weekly earnings growth is relatively stable over the business cycle and exhibits little skewness. Thus, models that rely on cyclical idiosyncratic risk, should focus on cyclical employment risk rather than on cyclical wage risk.