Evaluating the Great Micro Moderation

This paper studies the trends in the income volatility of US workers from 1950 to 2019 using high-quality administrative data from the Social Security Administration and Census’ LEHD. Our results indicate that income volatility, which is a measure of labor income risk, has been stable or declining for most of this period, with the exception of the early 1970s. The decline has been especially pronounced since the early 1980s and has been pervasive across the population it has been observed within most worker groups defined by gender, age, permanent earnings, and cohort, as well as by employer’s industry, age, and size. These findings contradict a common belief, based on survey data, that income volatility has significantly risen. We link the patterns of income volatility on the worker side to declining volatility on the firm employer side. We investigate several potential drivers of this trend to understand if declining volatility represents a broadly positive development—declining income risk and uncertainty—or a negative one—declining business dynamism. Various factors appear to play a role, including reduced macro volatility, older and larger firms, older employees, and industry mix, but, none of these individually appears to be a dominant force.

Working Paper