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The Evolution of Household Income Volatility

Douglas W. Elmendorf,
Douglas W. Elmendorf Former Brookings Expert, Dean - Harvard Kennedy School
Daniel E. Sichel, and
Headshot of Dan Sichel
Daniel E. Sichel Professor of Economics - Wellesley College
Karen Dynan
Karen Dynan
Karen Dynan Professor of the Practice of Economics - Harvard University, Nonresident Senior Fellow - Peterson Institute for International Economics

February 1, 2008

Abstract

We find that the volatility of household income—as measured by the standard deviation of two-year percent changes in income—increased one-third between the early 1970s and early 2000s. Based on data from the PSID, the rise in volatility represented an upward trend throughout the past thirty years and occurred within each major age and education group. The rise stemmed primarily from an increasing frequency of very large income changes rather than larger changes throughout the income distribution. We estimate notable increases in the volatility of both labor earnings and transfer income, and we show that the volatility of earnings per hour rose more than the volatility of hours worked.