On the Persistence of Income Shocks over the Life Cycle: Evidence, Theory, and Implications,Second Version

How does the persistence of earnings change over the life cycle? Do workers at different ages face the same variance of idiosyncratic shocks? This paper proposes a novel specification for residual earnings that allows for an age profile in the persistence and variance of labor income shocks. We show that the statistical model is identified and estimate it using PSID data. We find that shocks to earnings are only moderately persistent (around 0:75) for young workers. Persistence rises with age up to unity until midway in life. The variance of persistent shocks exhibits a U-shaped profile over the life cycle (with a minimum of 0:01 and a maximum of 0:05). These results suggest that the standard specification in the literature (with constant persistence and variances) cannot capture the earnings dynamics of young workers. We also argue that a calibrated job turnover model can account for these non-at profiles. The key idea is that workers sort into better jobs and settle down as they age; in turn, magnitudes of wage growth rates decline, thereby decreasing variance of shocks. Furthermore the decline in job mobility results in higher persistence. Finally, we investigate the implications of age profiles for consumption-savings behavior. The welfare cost of idiosyncratic risk implied by the age-dependent income process is 34 percent lower compared with its age-invariant counterpart. This difference is mostly due to a higher degree of consumption insurance for young workers, for whom persistence is moderate. These results suggest that age profilles of persistence and variances should be taken into account when calibrating life-cycle models.Idiosyncratic income risk, Incomplete markets models, Earnings persistence, onsumption insurance

On the Persistence of Income Shocks over the Life Cycle: Evidence and Implications, Second Version

How does the persistence of earnings change over the life cycle? Do workers at different ages face the same variance of idiosyncratic shocks? This paper proposes a novel specification for residual earnings that allows for a lifetime profile in the persistence and variance of labor income shocks. We show that the statistical model is identified and estimate it using PSID data. We strongly reject the hypothesis of a at life-cycle profile for persistence and variance of persistent shocks, but not for the variance of transitory shocks. Shocks to earnings are only moderately persistent (around 0.75) for young individuals. Persistence rises with age up to unity until midway in life. On the other hand, the variance of persistent shocks exhibits a Ushaped profile over the life cycle (with a minimum of 0.01 and a maximum of 0.045). Our estimate of persistence, for most of the working life, is substantially lower than typical estimates in the literature. We investigate the implications of these profiles for consumption-savings behavior with a standard life-cycle model. The welfare cost of idiosyncratic risk implied by the age-dependent income process is 32% lower compared to an AR(1) process without age profiles. This is mostly due to a higher degree of consumption insurance for young workers, for whom persistence is moderate. We conclude that the welfare cost of idiosyncratic risk will be overstated if one does not account for the age profiles in the persistence and variance of shocks.: Idiosyncratic income risk, Incomplete markets models, Earnings persistence, Consumption insurance

On the Persistence of Income Shocks over the Life Cycle: Evidence and Implications

This paper proposes a novel specification for residual earnings that allows for a lifetime profile in the persistence and variance of labor income shocks. We show theoretically that the statistical model is identified and estimate it using data from the PSID. We strongly reject the hypothesis of a flat life-cycle profile for persistence and variance of persistent shocks, but not for the variance of transitory shocks. Shocks to earnings are only moderately persistent (around 0.75) for young individuals. Persistence rises with age up to unity until midway in life and decreases to around 0.95 toward the end of the life cycle. On the other hand, the variance of persistent shocks exhibits a U-shaped profile over the life cycle (with a minimum of 0.01 and a maximum of 0.045). Our estimate of persistence, for most of the working life, is substantially lower than typical estimates in the literature. We investigate the implications of these profiles for consumption-savings behavior with a standard life-cycle model. Under natural borrowing limits, the welfare cost of idiosyncratic risk implied by the age dependent income process is 32% lower compared to an AR(1) process without age profiles. This is mostly due to a higher degree of consumption insurance for young workers, for whom persistence is moderate. The results hold qualitatively for an economy with no borrowing, although the difference between specifications is smaller (23%). We conclude that the welfare cost of idiosyncratic risk is overstated.Idiosyncratic income risk, Incomplete markets models, Earnings persistence, Consumption insurance

Case Study of Unemployment Insurance Reform in North Carolina

In July 1, 2013 unemployed workers in North Carolina lost access to all federally ?nanced unemployment bene?t extensions. In this document, the authors collect and describe available evidence on the performance of the labor market in North Carolina following this reform

Geographical reallocation and unemployment during the Great Recession: The role of the housing bust

This paper quantitatively evaluates the hypothesis that the housing bust in 2007 decreased geographical reallocation and increased the dispersion and level of unemployment during the Great Recession. We construct an equilibrium model of multiple locations with frictional housing and labor markets. When house prices fall, the amount of home equity declines, making it harder for homeowners to afford the down payment on a new house after moving. Consequently, the decline in house prices reduces migration and causes unemployment to rise differently in different locations. The model accounts for 90 percent of the increase in geographical dispersion of unemployment and the entire decline in net migration. However, despite large effects on migration and geographical dispersion of unemployment, the effect on aggregate unemployment is moderate: Our findings suggest that, absent the housing bust, aggregate unemployment would have been 0.5 percentage point lower

Kuvvetli Nonlineer Sistemler İçin Çok Ölçekli Lindstedt Poincare Tekniği

Konferans Bildirisi -- Teorik ve Uygulamalı Mekanik Türk Milli Komitesi, 2013Conference Paper -- Theoretical and Applied Mechanical Turkish National Committee, 2013Çok ölçekli metot ve Lindstedt-Poincare tekniğinin birleştirilmesi esasına dayanan yeni bir perturbasyon metodu ortaya atılmıştır. Yeni metot lineer sönümlü osilatör, Duffing denklemi, sönümlü kübik nonlineer denklem, kuadratik ve kübik nonlineer denklem ve zorlamalı Duffing denklemine uygulanmıştır. Klasik çok ölçekli metot ve yeni metodu kullanarak yaklaşık analitik çözümler elde edilmiştir. Bu çözümler ana denklemin sayısal çözümü ile karşılaştırılmıştır. Yeni metot kuvvetli nonlineer sistemler için çok iyi sonuçlar vermiştir.A new perturbation method combining the Method of Multiple Scales and Lindstedt Poincare techniques is proposed. The new method is applied to Linear damped oscillator, Duffing equation, damped cubic nonlinear equation, an equation with quadratic and cubic nonlinearities and forced Duffing equation. Approximate analytical solutions are obtained using the classical Multiple scales method and the new method. Both solutions are contrasted with the direct numerical solutions of the original equation. The new method produces much better results for strong nonlinearities

What Do Data on Millions of U.S. Workers Say About Life Cycle Income Risk?

This paper sheds new light on individual labor income risk using a unique and confidential dataset from the Social Security Administration on individuals' earnings histories. The substantial sample size allows us to cut the data in different and novel ways and document how earnings risk varies over the lifecycle and across individuals that differ in their lifetime income. The main conclusion of our research is that earnings risk varies significantly across the population in the following ways. First, the overall size of income risk becomes smaller with age, from age 25 to 50 and then increases again. Second, as individuals age, the likelihood of getting very small and very large shocks increases relative to the likelihood of middling shocks. Third, income shocks become more left skewed with age, meaning that, relative to the average change in income, a large fall becomes more likely than a large rise as individuals get older. Finally, earnings growth rates are dramatically different for individuals ranked by their lifetime income: individuals with lifetime earnings in the top 5% experience a growth rate from age 25 to 55 that is 10 times larger than individuals with average lifetime earnings. To provide useful input to policy relevant research, we estimate an econometric process that captures these salient features of earnings dynamics to provide a reliable “user's guide” for applied economists.Social Security Administrationhttp://deepblue.lib.umich.edu/bitstream/2027.42/102277/1/wp302.pd

Population Aging, Migration Spillovers, and the Decline in Interstate Migration

Interstate migration in the United States has declined by 50 percent since the mid-1980s. This paper studies the role of the aging population in this long-run decline. We argue that demographic changes trigger a general equilibrium effect in the labor market, which affects the migration rate of all workers. We document that an increase in the share of middle-aged workers (those ages 40 to 60) in the working-age population in one state causes a large fall in the migration rate of all workers in that state, regardless of their age. To understand this finding, we develop an equilibrium search model of many locations populated by workers whose moving costs differ. Firms prefer hiring local workers with high moving costs as they command lower wages due to their lower outside option. An increase in the share of middle-aged workers causes firms to recruit more from the local labor market instead of hiring from other locations, which increases the local job-finding rate and reduces everyon's migration rate ("migration spillovers"). Our model reproduces remarkably well several cross-sectional facts between population flows and the age structure of the labor force. Our quantitative analysis suggests that population aging accounts for about half of the observed decline, of which 75 percent is attributable to the general equilibrium effect