Peter Ganong, University of Chicago

Earnings Instability

Abstract

We analyze monthly earnings volatility using administrative payroll data. While it is well-documented that wages are largely stable, we find that this wage stability does not translate into earnings stability for most U.S. workers. Even within stable employment relationships, and even when wages are constant, many workers nevertheless face substantial monthly earnings volatility. The standard deviation of monthly earnings changes is 28%, while the standard deviation of base wage changes is only 2%. There is substantial heterogeneity in this volatility, with much higher volatility for hourly workers than for salaried workers. This degree of volatility is far higher than what is implied by benchmark models of earnings processes which are calibrated to previously-available annual data and used as inputs for leading macro models. To understand the welfare consequences of pay volatility, we estimate the amenity value of volatility using worker quits in a model of a frictional labor market. We find that workers have a high willingness to pay to reduce earnings volatility. Overall, this analysis shows that high-frequency labor market shocks are an important source of risk and fragility which has been masked by past studies of annual earnings.

Here is the paper. Please note that this link is to the most recent public version of the paper. The project has evolved significantly since this disclosure.

Peter Ganong is an economist who studies the effect of public policies on people facing difficult financial circumstances. In his research on the foreclosure crisis, he found that most borrowers defaulted due to insufficient liquidity and that many foreclosures could have been averted through liquidity-focused modifications to mortgages. He also has found that unemployment benefits play a crucial role in sustaining the consumption of unemployed workers. In ongoing work, he is studying the effects of racial wealth inequality and income volatility within employment relationships.

Ganong is a Research Associate at the National Bureau of Economic Research. He received his BA and PhD in economics from Harvard. He has spent two years in public service: one at the White House Council of Economic Advisers and one at the City of Boston’s Citywide Analytics Team. He has taught at the University of Chicago since 2017 and was a Visiting Assistant Professor at MIT during fall of 2021.

You can read more about Peter Ganong here

CEBI contact: Søren Leth-Petersen