Earnings growth is more procyclical at the bottom of the income distribution than at the top. Using high-quality administrative data from Germany, I show that the heterogeneity is chiefly driven by transitions between employment and non-employment, specifically job-finding. I build a heterogeneous agent business cycle model that can rationalize these empirical findings. Agents in the model endogenously choose where to search for work in a labor market that features directed search. The model reproduces the heterogeneous procyclicality of earnings growth, as well as the contribution of job-finding, along the income distribution. I use this model to evaluate two policies aimed at reducing business cycle risk: countercyclical hiring subsidies and universal basic income (UBI). The first policy proposal increases welfare relative to the baseline economy. Implementing UBI decreases the volatility of aggregate consumption but decreases welfare overall.
Host: Martin Blomhoff Holm