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The Dynamics of Income: Celebrating 50 years of the PSID

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon I
Hosted By: American Economic Association
  • Chair: David Johnson, University of Michigan

Economic Volatility and the PSID: A Record of Seminal Research

Peter Gottschalk
,
Boston College
Robert A. Moffitt
,
Johns Hopkins University
Sisi Zhang
,
Jinan University

Abstract

We start by reviewing the advantages and disadvantages of the Michigan Panel Study of Income Dynamics (PSID) for studying the extent of economic volatility. The PSID has major advantages for the study of economic volatility because of its length, its rules for following household members, and the comprehensiveness of its collection of demographic and economic characteristics of the family. The PSID does have some disadvantages relative to some other survey data sets and relative to administrative data sets which have much larger sample sizes, although those data sets usually lack the rich individual and family demographic variables available in the PSID. Second, we review some of the studies that have examined volatility with the PSID over the years. Early studies of both economic and demographic volatility were perhaps the first to reveal a startlingly high level of dynamism, mobility, but also instability and turbulence, in the lives of American families. We also review in much more detail the many studies of the volatility of earnings and income with the PSID and show that it has made major contributions, both methodological and substantive, to that literature over the last 40 years. A comparison of findings specifically on trends in U.S. volatility found in the PSID to trends found in other data sets show some common indications of rising volatility from the 1970s to the 1980s, followed by either a slowdown in the upward trend, a leveling off, or a decline, depending on the data set. In addition to disagreement on which of these post-1980s trends occurred, agreement on the earlier trends is also not completely universal. Finally, we conduct a new analysis of the volatility of male earnings in the PSID through 2014, finding that both gross volatility and the component consisting of only variance of transitory shocks have experienced a large increase during the Great Recession after following similar trends to those previously established showing upward trends from the 1970s to the 1980s followed by a stable period.

Nonlinear Persistence and Partial Insurance: Income Dynamics and Consumption Insurance in the PSID

Manuel Arellano
,
CEMFI, Madrid
Richard Blundell
,
University College London
Stephane Bonhomme
,
University of Chicago

Abstract

We highlight the important role the PSID has played in the development of our understanding of income dynamics and partial insurance. We examine alternative ways of modeling income persistence and focus on the nonlinear nature of income shocks. We explore a new quantile-based panel data framework, in which the persistence of past income shocks is allowed to vary according to the size and sign of the current shock. We show this approach matches the data well and, exploiting the enhanced consumption and asset data in recent waves of the PSID, show it also has key implications for consumption insurance. We confirm the results on income dynamics using the extensive population register data from Norway. The approach is used to provide new empirical measures of partial insurance in which the transmission of income shocks to consumption varies systematically with assets, the level of the shock and the history of past shocks.

Recent Trends in the Variability of Men’s Earnings: Evidence From Administrative and Survey Data

Michael Carr
,
University of Massachusetts Boston
Emily Wiemers
,
University of Massachusetts Boston

Abstract

Despite the rise in cross-sectional inequality since the late 1990s, the literature on earnings instability shows little consensus on trends during this period. Using consistent samples and methods in administrative and survey data, we examine earnings instability for men from 1978 through 2011, estimating simple measures of earnings volatility and error components models of earnings. We find that earnings instability increased after the mid 1990s, with increases that are nearly as large as the increases in the 1970s and 1980s. The increase occurs in both survey and administrative data and is driven largely by increases in transitory earnings variability.

How Much Consumption Insurance in the United States?

Dmytro Hryshko
,
University of Alberta
Iourii Manovskii
,
University of Pennsylvania

Abstract

Most of what the profession knows about joint income and consumption dynamics at the household level in the U.S. is based on the data from the Panel Study of Income Dynamics (PSID). We find that there are two sets of households in the PSID that differ dramatically in the dynamics of their income and consumption. Households headed by the original PSID males and their sons have a highly persistent income process, and permanent shocks to their incomes almost fully pass through to consumption. Households headed by males who marry daughters of the original PSID members have a much less persistent income process and a dramatically higher degree of consumption insurance. These differences are surprising but highly robust. Conditional on income dynamics, the degree of insurance in each subsample is consistent with the prediction of the standard incomplete-markets model. This result stands in contrast to the famous puzzle in Blundell, Pistaferri, and Preston (2008) of excess insurance of permanent income shocks for the combined sample.
Discussant(s)
Karen Dynan
,
Harvard University
James Ziliak
,
University of Kentucky
JEL Classifications
  • J3 - Wages, Compensation, and Labor Costs
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy