Consumption Dynamics under Time-Varying Unemployment Risk (with Erik Öberg)
We argue that adjustment frictions for durable goods generate a powerful amplification channel from fluctuations in unemployment risk to aggregate consumption demand.
First, we use Italian household survey data to document that durable expenditures react strongly to increased unemployment risk (with a semi-elasticity of around 3), while the effect on nondurable expenditures is indistinguishable from zero. Second, we propose and calibrate a buffer-stock savings model that includes adjustment frictions for durable goods. Households optimally employ an (S, s)-type decision rule, in which the value of postponing purchases of durables increases if unemployment risk is temporarily high. Although not targeted in the calibration, we find that the model reproduces the semi-elasticities of expenditures to unemployment risk estimated in the data.
Using the model, we find that the inclusion of adjustment frictions raises the aggregate demand response for durable goods to fluctuations in perceived unemployment risk by approximately 250 percent. Moreover, upon experiencing an adverse risk shock, the same frictions dampen the responsiveness of aggregate demand for durable goods to the interest rate and transitory income shocks, constraining monetary and fiscal transfer policies in stabilizing consumption in recessions.
The Labor-Market Origins of Cyclical Income Risk (with Hans Henrik Sievertsen)
We use Danish administrative data 1980-2013 to study the underlying mechanisms generating fluctuations in income risk. We partition the population into 37 narrowly defined educational categories and document the cyclicality of income risk for each category separately. For the individual educational categories, mean income growth is strongly correlated with income growth skewness, with an average correlation of 0.87-0.88. We show that the connection between income growth skewness and mean income growth is not only strong in the time dimension, but also in the cross section. Across the 37 educational categories, the correlation between mean income growth and income growth skewness is 0.93-0.96.
We show that labor-market frictions together with variations in productivity growth generate the relationship between mean income growth and income growth skewness. In a quantitative job-ladder model, variations in productivity growth quantitatively capture both the time-series and cross-sectional relationship. In contrast, variations in the job-finding rate, the job-separation rate and the offer-arrival rate for employed fail to generate the relationship between mean income growth and income growth skewness in our framework.
Work in Progress
Gender Differences in Danish Top Income Mobility (with Niels-Jakob Harbo Hansen, Hans Henrik Sievertsen, and Erik Öberg)
Durable Expenditure Dynamics: Evidence from Denmark (with Mikael Carlsson, Jeppe Druedahl, and Erik Öberg )
A Note: Assortative Mating and Income Inequality (2014)