## Employment Time and the Cyclicality of Earnings Growth

_IMF Working Papers, May 16, 2018_

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## Bibliographic details
- Authors: Eran B. Hoffmann, Davide Malacrino
- Published: May 16, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484353561.001

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### Summary and research question
- Authors: Eran B. Hoffmann, Davide Malacrino
- Date: May 16, 2018
- Pages: 67
- Working Paper No.: 2018/115
- DOI: https://doi.org/10.5089/9781484353561.001
- Core question: How does the distribution of earnings growth evolve over the business cycle in Italy, and what roles do changes in employment time versus changes in weekly earnings play in that evolution?

### Key findings
- The distribution of annual earnings growth is shaped by two distinct sources:
  - Changes in employment time (number of weeks of employment within a year).
  - Changes in weekly earnings.
- Changes in employment time:
  - Generate the tails of the earnings growth distribution.
  - Account for the increased dispersion and negative skewness in the distribution of earnings growth in recessions.
- Changes in weekly earnings:
  - Produce a cross-sectional distribution of weekly earnings growth that is symmetric and stable over the cycle.
- Implication for models:
  - Models that rely on cyclical idiosyncratic risk should separately account for the employment margin in their earnings process to avoid erroneous conclusions.
- Proposed process:
  - The authors propose an earnings process based on the combination of simple employment and wage processes with few parameters.
  - This process captures the procyclical skewness in changes in earnings growth and other important features of its distribution.

### Methods and scope
- Empirical focus: Italy.
- Decomposition approach: Distinguish annual earnings growth into employment-time changes and weekly-earnings changes.
- Modeling approach: Combine simple employment and wage processes with few parameters to replicate distributional features of earnings growth over the cycle.

### Policy and modeling implications
- For policymakers and modelers analyzing idiosyncratic risk and earnings dynamics:
  - Explicitly model the employment margin (employment time) separately from weekly wage dynamics.
  - Recognize that recessions increase dispersion and negative skewness of earnings growth primarily through employment-time adjustments rather than through changes in the distribution of weekly wages.
- For researchers calibrating macro-labor models:
  - Incorporate simple employment-time processes alongside wage processes to reproduce observed procyclical skewness and tail behavior in earnings growth distributions.

### Classification and keywords
- Subject: Employment, Labor, Labor markets, Unemployment, Wages
- Keywords: Earnings growth, earnings process, economic cycles, Employment, employment time, Global, growth distribution, Labor markets, Unemployment, Wages, weekly earnings, WP

*Source: IMF Working Papers — Employment Time and the Cyclicality of Earnings Growth (Working Paper No. 2018/115), Eran B. Hoffmann and Davide Malacrino, May 16, 2018.*

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_Source: https://www.imf.org/en/publications/wp/issues/2018/05/16/employment-time-and-the-cyclicality-of-earnings-growth-45836_