Cyclical labour income risk in Great Britain

Abstract

This paper provides new evidence on the cyclical behaviour of household labour income risk in Great Britain and the role of social insurance policy in mitigating against this source of income risk. To achieve this, we decompose stochastic idiosyncratic household income into its transitory and persistent components. We focus our analysis of income risk captured by the second to fourth moments of the probability distribution of shocks to the persistent component of income. We find that household labour income risk increases during contractions via changes in third and fourth central moments of persistent shocks to labour income, whereas the variance remains acyclical. We also find that economic policy has reduced the level of risk exposure and its increase during contractions via benefits rather than tax policies.