Research Paper IZA Discussion Papers 7491
Earnings and labour market volatility in Britain
We know a lot about the rise in earnings inequality over the last two to three decades in many OECD countries, including the USA and Britain. We know much less about how earnings instability trends differ across countries. This paper provides new evidence on earnings instability for British men and women, and undertakes some transatlantic comparisons.
We measure earnings instability using indices of ‘volatility’, which are defined in the following way. For each working-age individual, we calculate how much earnings change between one year and the next. How much instability (volatility) there is in aggregate is summarised by how spread out is the distribution of individual earnings changes. The greater the variance of short-term earnings changes, the more volatility there is. We look at trends in volatility over time by repeating the calculations for each pair of years between the beginning of the 1990s and 2008 (when the British Household Panel Survey, our data set, stopped running in its current form). The degree of volatility is indicative of the predictability of earnings. Best-selling books such as Jacob Hacker’s The Great Risk Shift have emphasised the connection between greater volatility and greater income ‘risk’ with reference to the US context.
In addition to providing new evidence for Britain to complement the growing literature about volatility in the USA, this paper has two further features. The first is that we provide evidence about volatility for women as well as men (virtually all US earnings volatility studies are about men). Second, we use measures of volatility that allow us to distinguish between labour market volatility and earnings volatility. Earnings volatility refers to volatility among individuals who have a job in two consecutive years. This is restrictive because it ignores individuals moving into or out employment or those who do not have job in either year, yet employment transitions are another source of volatility. Labour market volatility is the volatility that exists when one takes account of the earnings changes (appropriately defined) for all individuals, i.e. looking not only at those with positive earnings but also those with zero earnings.
We show that earnings volatility in Britain remained constant between 1992 and 2008 for both men and women. When we widen the scope to look at labour market volatility, we find that there is a marked decline over the period for both women and men, with the fall greater for men. The main factor accounting for the downward trend in labour market volatility is a secular decline in the proportions of workers moving into and out of employment or not having a job at all. These trends are correlated with the improvement in the British economy after the early-1990s recession and before the impact of the 2007/8 recession was felt.
The findings about volatility trends differ from those for the USA in several respects. In particular there has been no fall in labour market volatility in the USA and trends in employment attachment rates are quite different.