In this paper we offer new evidence on earnings and income volatility in the United States over the past four decades by using matched data from the March Current Population Survey. We find that between 1973 and 2008 family income volatility rose by 38 percent, primarily as a result of higher volatility of husbands earnings and non means-tested nonlabor income. Rising family income volatility is in evidence across race, education, and family structure, and after declining sharply while young, it is increasing in the latter part of the life cycle among the skilled. The Federal tax and transfer system dampens the magnitude of volatility in any given year, but not the trends. Nonparametric tests of structural change indicate that overall family income volatility peaked in 1999, with the 2000s characterized by greater short-term volatility rather than a continued secular increase. Most of the increase in family earnings volatility occurred prior to the 1990s, which coincides with the trend volatility of male earnings. The earnings volatility of women fell dramatically through the early 1980s, and the ongoing secular decline implies male and female earnings volatility is converging. A variance decomposition suggests that the trends in earning volatility are driven both by increases in the conditional variance of earnings of continuous workers as well as the variance of the conditional mean of those workers exiting the labor force.
Discussion Paper Number
Ziliak, James P.; Hardy, Bradley L.; and Bollinger, Christopher, "Earnings and Income Volatility in America: Evidence from Matched CPS" (2010). University of Kentucky Center for Poverty Research Discussion Paper Series. 55.