Firm Dynamics and Earnings Risk
Paper joint with Filip Rozsypal
Abstract:
We study the role of firm and worker level shocks for individual labor earnings dynamics. A key feature of the distribution of earnings changes is excess kurtosis, with substantial earnings changes for a significant proportion of workers. Using Danish matched employer-employee data, we show that large worker earnings changes occur along the entire firm revenue growth distribution but more frequently in the tails. In particular, large earnings losses are more likely in shrinking firms due to more employment separations, but also because of large wage losses of stayers. We interpret the evidence through the lens of an equilibrium search model with two-sided heterogeneity. The model reveals that while worker shocks account for the majority of earnings fluctuations, firm shocks generate around a third of endogenous separations and large wage losses for stayers. Finally, the model implies significant endogenous responses of earnings dynamics to policy changes aiming to insure workers directly or indirectly through firms.