Characterizing Income Risk in Chile and the Role of Labor Market Flows

This paper characterizes the income dynamics of Chile, a fast-growing small-open economy, using 21 years of high quality administrative data of labor earnings for the population of formal workers. We find a significant decline in income inequality up to the 90th percentile of the distribution. During the same period, income volatility increased, and the skewness of earnings growth became negative, especially after the COVID recession, indicating a shift in the sources of workers’ earnings risk. Using monthly earnings data, we show that rather than unemployment risk, it is earnings fluctuations that occur within an employment relation and in transitions between employers that are the major contributor to the negative skewness of earnings growth that is typically observed in a recession.