Employment Time and the Cyclicality of Earnings Growth

Author/Editor:

Eran B. Hoffmann ; Davide Malacrino

Publication Date:

May 16, 2018

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We study how the distribution of earnings growth evolves over the business cycle in Italy. We distinguish between two sources of annual earnings growth: changes in employment time (number of weeks of employment within a year) and changes in weekly earnings. Changes in employment time generate the tails of the earnings growth distribution, and account for the increased dispersion and negative skewness in the distribution of earnings growth in recessions. In contrast, the cross-sectional distribution of weekly earnings growth is symmetric and stable over the cycle. Thus, models that rely on cyclical idiosyncratic risk, should separately account for the employment margin in their earnings process to avoid erroneous conclusions. We propose such a process, based on the combination of simple employment and wage processes with few parameters, and show that it captures the procyclical skewness in changes in earnings growth and other important features of its distribution.

Series:

Working Paper No. 18/115

Subject:

English

Publication Date:

May 16, 2018

ISBN/ISSN:

9781484353561/1018-5941

Stock No:

WPIEA2018115

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

67

Please address any questions about this title to publications@imf.org