From the Peaks to the Valleys : Cross-State Evidence on Income Volatility Over the Business Cycle

Counter-cyclical variation in individuals' idiosyncratic labor income risk could generate substantial welfare costs. Following past research, we infer income volatility - the variance of permanent income shocks, a standard proxy for income risk - from the rate at which cross-sectional variances of income rise over the life-cycle for a given cohort. Our novelty lies in exploiting cross-state variation in state economic conditions or state sensitivity to national economic conditions. We find that income volatility is higher in good state times than bad; during good national times, we find volatility is higher in states that are more sensitive to national conditions