Family and government insurance: Wage, earnings, and income risks in the Netherlands and the U.S

• Published in: Journal of public economics 2021-01, Vol.193, p.104327, Article 104327
• Main Authors: De Nardi, Mariacristina, Fella, Giulio, Knoef, Marike, Paz-Pardo, Gonzalo, Van Ooijen, Raun
• Format: Article
• Language: English
• Subjects: Life-cycle; Progressive taxation; Redistribution; Self-insurance; Social insurance; Wage risk
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2020.104327

•The distribution of earnings changes is non-normal and varies by age and income.•Low- and high-income workers face more earnings risk than those at the median.•Most earnings fluctuations are related to changes in hours worked, rather than wages.•In the Netherlands, family insurance happens mostly via income pooling.•Government transfers are a major source of insurance for Dutch workers. 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 non-linearities in household disposable income by age and previous earnings in either country.