Date of Original Version

11-2002

Type

Article

Rights Management

© 2004 by The University of Chicago. All rights reserved.

Abstract or Description

We ask how idiosyncratic labor-market risk varies over the business cycle. A difficulty in addressing this question is the limited time-series dimension of existing panel data sets. We address this difficulty by developing a GMM estimator which conditions on the macroeconomic history experienced by each member of the panel. Variation in the cross-sectional variance between households with differing macroeconomic histories allows us to incorporate business-cycle information dating back to 1930, even though our data only begins in 1968. We implement this estimator using household-level labor-earnings data from the Panel Study on Income Dynamics. We estimate that idiosyncratic risk is (i) highly persistent, with an autocorrelation coefficient of 0.95, and (ii) strongly countercyclical, with a conditional standard deviation that increases by 75% (from 0.12 to 0.21) as the macroeconomy moves from peak to trough.

DOI

10.1086/383105

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Published In

Journal of Political Economy, 112, 3, 695-717.