Changing Income Risk across the US Skill Distribution: Evidence from a Generalized Kalman Filter
J. Carter Braxton, Kyle Herkenhoff, Jonathan Rothbaum, Lawrence Schmidt
American Economic Review · 2025 · Volume 115 · Issue 12
Abstract
For whom has earnings risk changed, and why? We answer these questions by combining the Kalman filter and EM algorithm to estimate persistent and temporary earnings for every individual at every point in time. We apply our method to administrative earnings linked with survey data. We show that since the 1980s, persistent earnings risk rose by 12.5 percent for both employed and unemployed workers and the scarring effects of unemployment doubled. At the same time, temporary earnings risk declined. Using education and occupation codes, we show that rising persistent earnings risk is concentrated among high-skill workers and related to technology adoption.
Keywords
Time Allocation and Labor Supply, Human Capital, Skills, Occupational Choice, Labor Productivity, Wage Level and Structure, Wage Differentials, Unemployment: Models, Duration, Incidence, and Job Search
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