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This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic. [ABSTRACT FROM AUTHOR]

Is individual labor income more risky in recessions? This is a difficult question to answer because existing panel data sets are so short. To address this problem, we develop a generalized method of moments estimator that conditions on the macroeeonomic history that each member of the panel has experienced. Variation in the cross-sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930, even though our data do not begin until 1968. We implement this estimator using household-level labor earnings data from the Panel Study of Income Dynamics. We estimate that idiosyncratic risk is (i) highly persistent, with an annual autocorrelation coefficient of 0.95, and (ii) strongly countercyclical, with a conditional standard deviation that increases by 75 percent (from 0.12 to 0.21) as the macroeconomy moves from peak to trough.

Byline: John Hassler (a)(b), Kjetil Storesletten (b)(c), Fabrizio Zilibotti (a)(b) Abstract: This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations. We focus on politico-economic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving. Author Affiliation: (a) Institute for International Economic Studies, Stockholm University, S-10691 Stockholm, Sweden (b) CEPR, London, UK (c) Department of Economics, University of Oslo, Box 1095 Blindern, N-0317 Oslo, Norway Article History: Received 20 February 2003; Revised 27 July 2005

A study analyzing income redistribution, as characterized by rational voting without commitment, among individuals with different incomes, is presented.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.08.012 Byline: John Hassler (a), Per Krusell (b), Kjetil Storesletten (c), Fabrizio Zilibotti (d) Abstract: We model income redistribution with dynamic distortions as determined by rational voting without commitment among individuals of different types and income realizations. We find that redistribution is too persistent relative to that chosen by a planner with commitment. The difference is larger, the lower is the political influence of young agents, the lower is the altruistic concern for future generations, and the lower is risk-aversion. Furthermore, there tends to be too much redistribution in the political equilibrium. Finally, smooth preference aggregation, as under probabilistic voting, produces less persistence and does not admit multiple equilibria, which occur under majority-voting aggregation. Author Affiliation: (a) IIES Stockholm University and CEPR, Sweden (b) Princeton University, IIES and CEPR, USA (c) University of Oslo, IIES and CEPR, Norway (d) IIES Stockholm University and CEPR, Sweden Article History: Received 26 February 2005; Accepted 23 August 2005 Article Note: (footnote) [star] We thank Costas Azariadis, Alex Cukierman, Allan Drazen, Ed Green, Robert King, Etienne Lehmann, Lars Ljungqvist, Dirk Niepelt, Torsten Persson, Harald Uhlig, Joseph Zeira and many seminar participants for valuable comments.

Earnings inequality is exogenous and is calibrated to match data from the U.S panel study on Income Dynamics. A general equilibrium overlapping generations model is used in which households face earnings shocks over the course of their lifetime.