Income risk stems from job transitions rather than persistent shocks

Using subjective expectations data from the NY Fed Survey of Consumer Expectations between 2014 and 2019, authors Manuel Arellano, Orazio Attanasio, Margherita Borella, Mariacristina De Nardi, and Gonzalo Paz-Pardo develop a new framework to estimate earnings dynamics.

The study finds that structural persistence in individual productivity shocks is 0.511 for men and 0.448 for women, roughly half of traditional estimates near 0.90. Conversely, fixed individual ability shows a standard deviation of 0.578 for men, significantly higher than prior estimates of 0.081. These results indicate that high reduced-form income persistence reflects stable worker characteristics and match quality rather than long-lasting productivity shocks.

Conventional models relying solely on realized earnings histories suffer from selection bias, as earnings are only observed for employed workers.

By analyzing counterfactual job offers and acceptance probabilities, the authors isolate true risk from job sorting.

Simulations show that reduced-form earnings volatility averages 13 percent across the income distribution.

However, once person- and employer-specific heterogeneity are removed, volatility drops to 7.7 percent and becomes constant.

Most income uncertainty occurs during employer switches rather than within existing job matches.