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Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks

Author

Listed:
  • Manuel Sanchez

    (University of Bristol)

  • Felix Wellschmied

    (Universidad Carlos III de Madrid)

Abstract
We estimate explicit age-varying distributions of idiosyncratic persistent and transitory earnings shocks over workers' life-cycles using a German administrative data set. Large positive shocks, both transitory and persistent, are characteristic for the first eight years of the working life. After the age of 50, large negative shocks become a major source of earnings risk. Between the ages of 30 and 50, most shocks are small and transitory. Large persistent positive shocks that occur early in the working life help to rationalize large wealth and consumption shares of the top one percent in an incomplete markets model. (Copyright: Elsevier)

Suggested Citation

  • Manuel Sanchez & Felix Wellschmied, 2020. "Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 103-126, July.
    • Handle: RePEc:red:issued:18-252
    DOI: 10.1016/j.red.2019.11.003
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    Cited by:

    1. Koray Aktas, 2021. "Characterizing Life-Cycle Dynamics of Annual Days of Work, Wages, and Cross-Covariances," Working Papers 465, University of Milano-Bicocca, Department of Economics.
    2. Siqi Wei, 2022. "Income, Employment and Health Risks of Older Workers," Working Papers wp2022_2205, CEMFI.
    3. Ursula Mello & Tomas Rodriguez Martinez, 2020. "Trade-induced Local Labor Market Shocks and Asymmetrical Labor Income Risk," Working Papers 1230, Barcelona School of Economics.
    4. Bagliano, Fabio C. & Fugazza, Carolina & Nicodano, Giovanna, 2024. "Life-cycle risk-taking with personal disaster risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 378-396.
    5. Wolfgang Dauth & Johann Eppelsheimer, 2020. "Preparing the sample of integrated labour market biographies (SIAB) for scientific analysis: a guide," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 54(1), pages 1-14, December.

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    More about this item

    Keywords

    Life-cycle; Earnings risk; Wealth dispersion; Consumption inequality;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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