The Korean Economic Review
Causes of Earnings Volatility and Risk Sharing
Donggyun Shin (Kyung Hee University)Year 2011Vol. 27No. 2
This paper investigates the causes of volatility of household heads’ earnings, evaluates the extent to which variability of the heads’ earnings is translated into changes in household consumption, and, in the process, identifies effective measures of smoothing idiosyncratic earnings variation. Analysis, based on the Panel Study of Income Dynamics (PSID) data, reveals that, although causes of the earnings volatility are multi-dimensional, job separations are closely related with substantial earnings changes. Evidence also shows that estimated volatility in the heads’ earnings is almost entirely smoothed by a combination of various smoothing measures, with the labor supply of other family members being the most effective measure among them. Overall, the current findings suggest that the welfare loss may not be as great as what is suggested by the observed volatility of the heads’ earnings.