THE LABOR MARKET in the United States is marked by considerable
year-to-year variation in individual earnings. In theory, variation in
the earnings of family heads need not be a source of welfare loss to
families. Families can rely on their own savings, the labor supply of
other family members, and government tax and transfer programs to
smooth this variation, so that family consumption remains unchanged.
In practice, however, these sources of consumption smoothing may be
far from adequate. This issue takes on particular salience in the United
States today, because of a substantial increase in the instability of
earnings over the past twenty years. As Peter Gottschalk and Robert
Moffitt have shown, and as we confirm below, earnings variation has
trended upward since the early 1970s. We estimate that over the period
1970-91, earnings variation has grown by a striking 76 percent.
