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Labor markets are characterized by large heterogeneity in job stability. Some workers hold lifetime jobs, whereas others cycle repeatedly in and out of employment. This paper explores the economic consequences of such heterogeneity. Using Survey of Consumer Finances (SCF) data, we document a systematic positive relationship between job stability and wealth accumulation. Per dollar of income, workers with more stable careers hold more wealth. We also develop a life-cycle consumption-saving model with heterogeneity in job stability that is jointly consistent with empirical labor market mobility, earnings, consumption, and wealth dynamics. Using the structural model, we explore the consequences of heterogeneity in job stability at the individual and macroeconomic level. At the individual level, we find that a bad start to the labor market leaves long-lasting scars. The income and consumption level for a worker who starts working life from an unstable job is, even 25 years later, 5 percent lower than that of a worker who starts with a stable job. For the macroeconomy, we find welfare gains of 1.6 percent of lifetime consumption for labor market entrants from a secular decline in U.S. labor market dynamism.
Documenting trends in job stability over the past twenty-five years has become a controversial exercise. The two main sources of information on employer tenure, the Panel Study of Income Dynamics (PSID) and the Current Population Survey (CPS), have generally given different pictures of the degree of job stability in the U.S. economy. This paper examines whether the PSID and CPS yield systematically different results with respect to comparable measures of job stability. We find that there is little evidence in either data set of a trend in the share of employed individuals with one year or less of tenure. Both data sets do show an increase in the fraction of male workers aged 30 and over with tenure less than ten years beginning in the early 1990's. We find that the two data sets provide nearly identical results for the 1980's and 1990's while in the 1970's they give results that are somewhat less comparable. We argue that this is probably the result of changes in the CPS tenure question following the 1981 survey. The effects of this change and the choice of ending year and variable definition in PSID-based studies are the most likely explanations for the disparate findings in the literature
Analyses of savings rates needed for successful retirement rates (SSRs) typically assume constant real earnings growth throughout one's career. However, data on the life-cycle earnings patterns of millions of U.S. workers suggest that earnings growth does not occur at a constant rate that matches inflation. Instead, earnings tend to increase at a decreasing rate during the early years of one's career and decrease at an increasing rate in the later years. Utilizing simulations of saving and dissaving throughout the life cycle based on both historical market returns and forecasted returns, the authors examine the impact of assuming more realistic earnings growth relative to constant inflation-adjusted growth. Results indicate that failing to account for more realistic earnings curves throughout the life cycle may overstate SSRs for lower-income households while understating SSRs for higher-income households, and understate SSRs for younger households while overstating SSRs for older households. Furthermore, historical SSRs of 10% or less are found for all but the highest-income households after accounting for more realistic earnings curves and Social Security benefits--though variations in specific effects may exist based on the simulation methods utilized.
This paper argues that precautionary savings against uncertain income comprise a large fraction of aggregate savings. A closed-form approximation for life cycle consumption subject to uncertain interest rates and earnings is derived by taking a second-order Taylor-Series approximation of the Euler equations. Using empirical measures of income uncertainty, I find that precautionary savings comprises up to 56 percent of aggregate life cycle savings. The derived expression for n-period optimal consumption is easily implemented for econometric estimation, and accords well with the exact numerical solution. Empirical comparisons of savings patterns among occupational groups using the Consumer Expenditure Survey contradict the predictions of the life cycle model. Riskier occupations, such as the self-employed and salespersons, save less than other occupations, although this finding may in part reflect unobservable differences in risk aversion among occupations
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.
The lifecycle approach is the workhorse to model saving decisions of individuals. It conjectures individuals preferring a constant consumption stream across their lifecycle saving till retirement and dis-saving thereafter. The reality is often at odd with this assumption giving rise to our conjectured three-tier life-cycle model by income groups. The low-income tier does little saving and in consequence little dissaving; the high-income tier does save during active life and profits often from bequests, but no dissaving is taking place unless hit by a major shock; only the middle tier behaves broadly as predicted. The drivers for such a differentiated behavior are conjectured to be threefold: External settings such as a multitude of shocks; preferences deviations such a behavioral bias, and institutional settings and interventions, such as minimum income provisions. The paper outlines these corresponding hypotheses, presents some first conceptual and empirical support, and reviews the international literature on the conjectured drivers. The review of international literature does not shatter our conjecture of a broadly three-tiered and reframed applicability of the life cycle model but offers some first precisions and wrinkles. The paper proposes next conceptual and empirical steps, including enriching existing wealth distribution estimates at retirement with sound estimates of social insurance wealth (pension and health), focused hypothesis testing of the key drivers with household panel data, and formulating policy responses if the new hypotheses are not rejected.
We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
This volume seeks to go beyond the microeconomic view of wages as a cost having negative consequences on a given firm, to consider the positive macroeconomic dynamics associated with wages as a major component of aggregate demand.