Earnings Instability
Earnings Instability
Authors: Christina Patterson, Peter Ganong, Pascal Noel, Joseph Vavra, Alexander Weinberg
Abstract: We analyze monthly earnings volatility using administrative payroll data. While it is well-documented that wages are largely stable, we find that this wage stability does not translate into earnings stability for most U.S. workers. Even within stable employment relationships, and even when wages are constant, many workers nevertheless face substantial monthly earnings volatility. The standard deviation of monthly earnings changes is 28%, while the standard deviation of base wage changes is only 2%. There is substantial heterogeneity in this volatility, with much higher volatility for hourly workers than for salaried workers. This degree of volatility is far higher than what is implied by benchmark models of earnings processes which are calibrated to previously-available annual data and used as inputs for leading macro models. To understand the welfare consequences of pay volatility, we estimate the amenity value of volatility using worker quits in a model of a frictional labor market. We find that workers have a high willingness to pay to reduce earnings volatility. Overall, this analysis shows that high-frequency labor market shocks are an important source of risk and fragility which has been masked by past studies of annual earnings.
Seminar Notes
Objective
Does stable employment mean workers have stable earnings from month to month?
Importance
Most evidence on employment and earnings comes from annual data - doesn't capture volatility, intensive/extensive margin.
Background
65% of Americans are living paycheck to paycheck.
92% of Americans would choose financial stability over larger paycheck
Data & Key Variables
Paycheck-level data from large payroll processing company. Serves primarily small firms (<100 employees). Around 500,000 firms.
Paycheck-level earnings and hours - gross pay per paycheck, components (base pay, bonuses)
Job spell ends when worker has >2 months of zero pay
Supplemental data sources: JP Morgan Chase microdata, SIPP
Results
Monthly standard deviation of earnings>=31%.
Hours fluctuations are a large source of earnings instability
High-frequency labor market shocks within employment are important and hidden in annual earnings data
Comments
Biweekly paychecks cause volatility in LEHD data - so hard to look at this with LEHD data
Key Table/Figure
