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Family and Government Insurance: Wage, Earnings, and Income Risks in the Netherlands and the U.S.

Institute Working Paper 42 | Published October 26, 2020

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Authors

Giulio Fella Queen Mary University of London, CFM, and IFS

Marike Knoef Leiden University and Netspar

Gonzalo Paz-Pardo European Central Bank

Raun Van Ooijen University of Groningen, University Medical Center Groningen, and Netspar

Family and Government Insurance: Wage, Earnings, and Income Risks in the Netherlands and the U.S.

Abstract

We document new facts about risk in male wages and earnings, household earnings, and pre- and post-tax income in the Netherlands and the United States. We find that, in both countries, earnings display important deviations from the typical assumptions of linearity and normality. Individual-level male wage and earnings risk is relatively high at the beginning and end of the working life, and for those in the lower and upper parts of the income distribution. Hours are the main driver of the negative skewness and, to a lesser extent, the high kurtosis of earnings changes. Even though we find no evidence of added-worker effects, the presence of spousal earnings reduces the variability of household income compared to that of male earnings. In the Netherlands, government transfers are a major source of insurance, substantially reducing the standard deviation, negative skewness, and kurtosis of income changes. In the U.S. the role of family insurance is much larger than in the Netherlands. Family and government insurance reduce, but do not eliminate nonlinearities in household disposable income by age and previous earnings in either country.


Published in _Journal of Public Economics_ (Vol. 193, January 2021, article 104327), https://doi.org/10.1016/j.jpubeco.2020.104327.