The Distributions of Income and Consumption

Risk: Evidence from Norwegian Registry Data

∗ †
Elin Halvorsen Hans A. Holter Serdar Ozkan Kjetil Storesletten

February 15, 2017

Preliminary Extended Abstract Version Prepared for the SED 2017 Meeting

Abstract

Using the Norwegian Registry Data, containing income and wealth information for
the entire Norwegian population, we study the distributions of idiosyncratic income
and consumption risk over the life-cycle and over the business-cycle. For this purpose,
we rst document moments (including higher order moments) from the distributions
of growth rates of labor income, business income and capital income, after tax and
after transfer income both at the individual level, for males and females, and at the
household level. We then decompose the growth in labor earnings into changes in wages
and changes in labor hours, in particular, changes in extensive and intensive margins.
At the household level, we also study the distribution of consumption risk and the
degree of consumption insurance towards labor market risk.
We nd that for individual labor income the Norwegian data is qualitatively remark-
ably similar to the recent studies on population wide U.S. registry data by Guvenen
et al. (2015, 2014) (quantitatively there is more inequality and larger risk in the U.S.).

The much richer Norwegian data, however, allows us to go beyond individual labor
income. So far we nd (i) The strong negative skewness of individual labor income,
which have previously been documented, is due to negative skewness of work hours. (ii)
Both capital income and the progressive Norwegian tax- and transfer system contribute
signicantly towards reducing the eect of the negatively skewed labor income on total
individual income.

JEL Codes: E24, J24, J31.

Keywords: Earnings dynamics, consumption dynamics, kurtosis, skewness.

∗
University of Oslo; hans.holter@econ.uio.no; https://sites.google.com/site/hansaholter/
†
University of Toronto; serdar.ozkan@utoronto.ca; www.serdarozkan.me
1 Introduction
Quantifying and modeling income and consumption risk is central in many elds of eco-

nomics, including labor economics, public nance and asset pricing. Until recently, empir-

ical studies have relied on relatively small samples of survey data and there is still high

uncertainty about the distribution of income risk and how much of it that translates into

consumption risk. An overwhelmingly large part of the literature does for instance, without

much empirical support, assume that income risk is normally distributed.

Guvenen et al. (2015, 2014) use administrative data from the US Social Security agency

to shed light on the distribution of individual annual earnings changes. One important fea-

ture of the data is that earnings changes are extremely leptokurtic (kurtosis is as high as

35 compared with 3 for a Gaussian distribution). Namely, in a given year most individuals

experience very small changes in earnings relative to the overall standard deviation, but a

very few experience extremely large shocks. In addition, earnings data display strong nega-

tive skewness, which implies that workers are more likely to experience very large negative

changes in their earnings (disaster shocks) compared to very large positive shocks.

Being able to utilize a large panel of registry data, Guvenen et al. (2015, 2014), is a

rst step in the right direction for the empirical analysis of earnings dynamics. However,

several important questions cannot be answered due to limitations of the SSA data. One

shortcoming of the SSA dataset is the lack of detailed information on components of annual

individual earnings, i.e., weekly or hourly wages, unemployment spells and weekly hours. It is

not possible to decompose the annual earnings change distribution into its components using

the SSA data. Thus we do not know what explains the concentration at the center of the

distribution, the very large tails and the negative skewness. Are the non-Gaussian properties

of annual earnings changes due to leptokurtic and negatively skewed distribution of wage

changes or of hours changes. The answers to these questions are central to understanding

the economic mechanisms behind these features of the data and in turn, the consumption

insurance available for households against these changes.

2
 In this paper we study the distributions of income and consumption risk for individuals

and households, using the Norwegian Registry data. We begin by documenting moments

(including higher order moments) from the distributions of growth rates of labor income,

business income and capital income, after tax and after transfer income both at the individual

level, for males and females, and at the household level. We nd that the distribution of

individual labor income growth rates in Norway is qualitatively very similar to the U.S.

distribution, although quantitatively there is larger variance in the U.S. Similar to what has

previously been documented for the U.S. labor income risk in Norway is negatively skewed.

However, looking at income, including capital income, the negative skewness is smaller and

income after taxes and transfers is even less negatively skewed. This illustrates the roles of

saving and of the progressive Norwegian tax and transfer system in insuring agains labor

market risk.

Next, we decompose the growth in labor earnings into changes in wages and changes in

labor hours, in particular, changes in extensive and intensive margins. We nd that the

negative skewness and high kurtosis of individual labor income is driven by the negative

skewness of work hours. The distribution of hourly wages is closer to log-normal.

Furthermore, Norwegian Registry data allows us construct household consumption by

providing data on household wealth (along with the data on income). Thus we exploit

household budget constraint to construct consumption at the household level (as in Fagereng

et al. (2015)). Using this measure of consumption we study the distribution of household

consumption growth rates.

Last, we document how idiosyncratic risk evolves when one moves from individual labor

income to household income before and after taxes and transfers.

3
2 Empirical Methodology

2.1 Data

A more detailed data description to follow. The variables that we have in our data set

include, but is not limited to, the following: wage and salary income, business income,

capital income, unemployment benets at the individual level for both males and females,

household labor income, household business income, household total income, household after-

tax after-transfer income, household consumption (constructed from detailed wealth and

income data).

2.2 Sample Selection

We follow a similar empirical methodology with Guvenen et al. (2015, 2014). Our base

sample is a revolving panel that maximizes sample size (important for precise computation

of higher-order moments for nely dened groups) and allows a stable age structure over time.

It is constructed as follows. First, an individual-year earnings observation must satisfy two

criteria to be admissible for that year: the individual (i) must be between 25 and 60 years old

(working age) and (ii) must have participated in the labor marketthat is, have earnings

(sum of wage/salary income and two thirds of business income/self employment income)

above Ymin,t . The threshold Ymin,t is chosen as the annual earnings level corresponding to

one quarter of full-time work (13 weeks at 40 hours per week) at half of the legal minimum

wage. This condition is fairly standard in the income dynamics literature and ensures that

we select individuals with a reasonably strong labor market attachment (see, e.g., Abowd

and Card (1989) and Meghir and Pistaferri (2004)).

For each year t, we will construct moments by conditioning on individuals' average earn-

ings from t−5 to t−1 and compute statistics based on income changes from year t to t+k
(k = 1, 5); see Figure 1. The revolving panel for year t selects individuals for which this

conditioning can be done in a sensible way. Thus, an individual is in the base sample if he

4
 Figure 1: Timeline for Rolling Panel Construction

is admissible in t−1 and in at least two more years between t−5 and t − 2. This ensures

that the individual was actively in the labor market and has earnings records from which we

can compute a measure of average recent earnings, as we describe in a moment. For some

statistics, such as change from yt to yt+k , we also require the individual to be admissible in

t and t + k. This is specied later below.

Recent Earnings. We now dene a measure of what we call recent earnings, a term

i i
used throughout the paper. Let ỹt,h ≡ log(Ỹt,h ) denote the log earnings (sum of wage/salary

earnings and two thirds of business income ) of individual i who is h years old in year t. (We

will suppress dependence on age whenever it does not create confusion.) For a given worker,

we compute his average earnings between years t − 1 and t − 5. We set earnings observations

below Ymin,t to the threshold for this computation. We also control for age eects as follows.

We rst estimate age dummies, denoted dh , by regressing log individual earnings on a full set
of age and (year-of-birth) cohort dummies. We then construct ve-year average earnings in

P5
the population from ages h−5 to h − 1: s=1 exp(dh−s ). Finally, we normalize the worker's

average past earnings with this measure to clean age eects. Thus, our measure of recent

earnings (hereafter, RE) is

5 i
i
X Ỹt−s,h−s
Ȳt−1 ≡ .
s=1 exp(dh−s )

We will we rst group individuals in the base sample into ve-year age bins based on their

age in year t − 1: 2529, 3034,..., 5054, and 5560. For each year t, we group individuals

i
based on their age and recent earnings as of time t − 1,Ȳt−1 . If these groupings are done at

a suciently ne level, we can think of all individuals within a given age/RE group to be ex

5
ante identical (or at least very similar).

Growth Rate Measures. Once we construct nely dened groups of workers we can

compute the cross-sectional moments of dierent measures of income changes, between t

and t + 1 and t and t + 5 such as labor income, total individual income (sum of labor income
and capital income), after transfer total income (sum of total income and unemployment

benets). It will be useful to distinguish between income growth over short and long horizons,

i.e., t and t+1 and t and t + 5. We think of these as roughly corresponding to transitory

and persistent earnings shocks.

We consider two measures of earnings growth rates, each with its own distinct advantages.

Let
i
zti = z̃t,h − dzh denote log type-z income (which could be labor income, total income, etc.)

i 1
net of age eects of type-z income, where z̃t,h is simply the log type-z income. The rst

growth measure is the familiar

log change: ∆k zti ≡ (zt+k,h+k

i
− z it,h ) = (z̃t+k,h+k
i
− dzh+k ) − (z̃t,h
i
− dzh ).

This measure is well known, and its higher-order moments for a lognormal distribution

are familiar to readers (zero skewness and a kurtosis coecient of 3). While this familiarity

makes it a good choice for the nonparametric and descriptive analysis, it also has a well-

known drawback: because log of zero is −∞, we need to drop observations close to zero so

as to obtain sensible statistics. Thus, when we use ∆k zti to compute a statistic, we drop

individuals from the base sample whose data are not admissible (type-z income below Ymin,t )
in t or t + k. This forces us to ignore valuable information in the extensive margin. Thus, we

borrow a second and closely related measure, which is commonly used in the rm dynamics

literature (see, e.g., ?) where rm entry and exit are key margins and lead to the same

1 We estimate age dummies, denoted dzh , by regressing log type−z income on a full set of age and (year-
of-birth) cohort dummies.

6
diculties with logs. The measure is

i
i Zt+k − Zti
arc-percent change: ∆arc Zt,k =  ,
i
Zt+k + Zti /2

where Zti is the level of type-z income. This measure allows computation of time dierences

even when the individual has zero income in one of the two years, thereby also capturing the

extensive margin of earnings changes.

Please note that we keep our conditioning income variable, which is recent

earnings Ȳt−1
i
, same for all measures of income (i.e., for any type-z income) whose

future growth rate we compute.

Household-Level Income We can apply the above methodology to the household-level

income and household consumption.

3 Results

3.1 The Distributions of Individual Labor Income Growth in Nor-

way and the U.S. are Qualitatively Similar

In this section we study moment of male individual labor earnings in Norway and compare to

those documented for the U.S. by Guvenen et al. (2015, 2014). We also report the moments

for females.

3.1.1 Second Moment: Variance of Earnings Growth

To illustrate how the dispersion of earnings shocks vary over the life-cycle Figure 2 plots

the standard deviation of one-year and ve-year earnings growth of Norwegian males by

age and recent earnings (hereafter, RE) groups (as dened in Section 2.2). The following

patterns hold true for both short- and long-run growth rates. First, for every age group,

7
 there is a pronounced U-shaped pattern by RE levels, implying that earnings changes are less

dispersed for individuals with higher RE up to about the 90th percentile (18th quantile along

the x-axis). This pattern reverts itself inside the top 10% as dispersion increases rapidly with

recent earnings. Second, over the life cycle, the dispersion of shocks declines monotonically

up to about age 50 (with the exception of very top earners) and then rises slightly for middle-

to high-earning individuals from ages 50 to 55.

0.85
0.6
25-29 0.8 25-29
0.55 30-34 30-34
35-39 0.75 35-39
Standard Deviation of yt+1 − yt

Standard Deviation of yt+5 − yt

40-44 40-44
0.5 45-49 0.7 45-49
50-54 50-54
0.65
0.45
0.6
0.4
0.55

0.35 0.5

0.45
0.3
0.4
4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 2: Standard Deviation of Male Earnings Growth in Norway

Figure 3: Standard Deviation of Male Earnings Growth in the U.S. (Figure from Guvenen
et al. (2015))

Figure 3, taken from Guvenen et al. (2015) displays a qualitatively identical picture of

8
the standard deviation of earnings growth of U.S. males by age and recent earnings. The

dierence between Norway and the U.S. is that the standard deviations are generally larger

in the U.S. Figure 18 in the Appendix displays the standard deviation of earnings growth

for Norwegian women. The results are both qualitatively and quantitatively quite similar to

those for Norwegian men. One dierence is that the U-shape with higher standard deviations

for the highest earners is less pronounced for women.

3.1.2 Third Moment: Skewness

With the assumption of log-normality of earnings shocks, which is commonly used in the

literature, the skewness of is zero. Figure 4 plots the skewness, measured here as the third

standardized moment, of one-year (left) and ve-year (right) earnings growth for Norwegian

males. The rst point to observe is that almost every part of every graph in both panels lie

below the zero line, indicating that earnings changes are negatively skewed at every stage of

the life cycle and for all earnings groups. The second point is that skewness is increasingly

more negative for individuals with higher earnings and as individuals get older. Thus, it

seems that the higher an individual?s current earnings, the more room he has to fall and the

less room he has left to move up. And this is true for both short-run and long-run earnings

changes. Curiously, and as was the case with the standard deviation, the life-cycle pattern

in skewness becomes weaker at the top of the earnings distribution.

Figure 5 displays the skewness of one-year (left) and ve-year (right) earnings growth for

U.S. males. The pictures are both qualitatively and quantitatively very similar to those for

Norwegian males. Figure 19 in the Appendix displays the skewness of earnings growth for

Norwegian females. The negative skewness is even more pronounced for women but varies

similarly to that of men over age- and earnings group

Another measure of asymmetry is provided by Kelly's measure of skewness, which is

dened as:

9
 0 0

-0.5
-0.5
Skewness of yt+1 − yt

Skewness of yt+5 − yt
-1
-1

-1.5
25-29 25-29
30-34 -1.5 30-34
35-39 35-39
-2
40-44 40-44
45-49 45-49
50-54 -2 50-54
-2.5

0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 4: Skewness of Male Earnings Growth in Norway

Figure 5: Skewness of Male Earnings Growth in the U.S. (Figure from Guvenen et al. (2015))

(P90 − P50 ) − (P50 − P10 )

Sk = (1)
P90 − P50

where Pxy refers to percentile xy of the distribution under study. Basically, Sk measures

the relative fractions of the overall dispersion (P90?P10) accounted for by the upper and lower

tails. An appealing feature of Kelly's skewness relative to the third standardized moment is

that a particular value is easy to interpret. A negative value of SK implies that the lower tail

10
 (P50-P10) is longer than the upper tail (P90-P50), indicating negative skewness. Another

property of Kelly?s measure is that it is less sensitive to extremes (above the 90th or below

the 10th percentile of the shock distribution). Instead, it captures the shift in the weight

distribution in the middling section of the shock distribution, whereas the third moment also

puts a large weight on the relative lengths of each tail.

0.25
25-29 0.2 25-29
0.2 30-34 30-34
35-39 35-39
40-44 40-44
Kelly Skewness of yt+1 − yt

Kelly Skewness of yt+5 − yt

0.1
0.15 45-49 45-49
50-54 50-54
0.1 0

0.05
-0.1
0

-0.2
-0.05

-0.1
-0.3

0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 6: Kelly Skewness of Earnings Growth in Norway

Figure 7: Kelly Skewness of Earnings Growth in the U.S. (Figure from Guvenen et al. (2015))

In Figures 6 and 7 we plot the Kelly skewness of labor income growth for Norwegian and

U.S. males by age and income percentile. The Kelly skewness is negative for most age and

income groups in Norway and all age and income groups in the U.S. The Kelly skewness is

11
generally slightly larger for U.S. men than for Norwegian men. Figure 20 shows that the

Kelly skewness if somewhat more negative for women than for men in Norway.

3.1.3 Fourth Moment: Kurtosis

40 22

20
35

18
30
Kurtosis of yt+1 − yt

Kurtosis of yt+5 − yt
16

25 14

12
20
25-29 25-29
30-34 10 30-34
15 35-39 35-39
40-44 8 40-44
45-49 45-49
10 50-54 6 50-54

4
4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 8: Kurtosis of Earnings Growth in Norway

Figure 9: Kurtosis of Earnings Growth in the U.S. (Figure from Guvenen et al. (2015))

12
3.2 The Negative Skewness of Labor Income Shocks is Driven by

Work Hours

Figure 10: Standard Deviation of Male Hours Growth in Norway

Figure 11: Standard Deviation of Male Hourly Wages Growth in Norway

13
 Figure 12: Kelly Skewness of Male Hours Growth in Norway

Figure 13: Kelly Skewness of Male Hourly Wage Growth in Norway

14
 3.3 The Welfare State Works: How Transfers Help Remove the

Negative Skewness of Labor Income Shocks

0.75

25-29 0.7 25-29

0.5
30-34 30-34
35-39 35-39
Standard Deviation of yt+1 − yt

Standard Deviation of yt+5 − yt

0.65
40-44 40-44
0.45 45-49 45-49
50-54 0.6 50-54

0.4 0.55

0.5
0.35

0.45

0.3
0.4

0.25 0.35

4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 14: Standard Deviation of Male Gross Income Growth in Norway

0.25

0.2 25-29 0.2 25-29

30-34 30-34
35-39 0.15 35-39
40-44 40-44
Kelly Skewness of yt+1 − yt

Kelly Skewness of yt+5 − yt

0.15
45-49 0.1 45-49
50-54 50-54
0.1 0.05

0
0.05
-0.05

0 -0.1

-0.15
-0.05
-0.2

0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 15: Kelly Skewness of Male Gross Income Growth in Norway

15
 0.65

0.45 25-29 25-29

30-34 0.6 30-34
35-39 35-39
Standard Deviation of yt+1 − yt

Standard Deviation of yt+5 − yt

40-44 40-44
0.4 45-49 0.55 45-49
50-54 50-54
0.5
0.35

0.45

0.3
0.4

0.35
0.25

4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 16: Standard Deviation of Male After Tax Income Growth in Norway

0.2 0.2
25-29
30-34
35-39 0.15
40-44
Kelly Skewness of yt+1 − yt

Kelly Skewness of yt+5 − yt

0.15
45-49 0.1
50-54
0.1 0.05

0
0.05 25-29
-0.05 30-34
35-39
0 -0.1 40-44
45-49
50-54
-0.15
-0.05

0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 17: Kelly Skewness of Male After Tax Income Growth in Norway

16
3.4 The Distributions of Household Labor Earnings and Disposable

Incomes

3.5 The Distribution of Consumption Shocks

3.6 Consumption Insurance Towards Income Shocks

17
 4 Appendix

4.1 Additional Figures and Tables

0.85
0.6
25-29 0.8 25-29
0.55 30-34 30-34
35-39 0.75 35-39
Standard Deviation of yt+1 − yt

Standard Deviation of yt+5 − yt

40-44 40-44
0.5 45-49 0.7 45-49
50-54 50-54
0.45 0.65

0.6
0.4
0.55

0.35
0.5

0.3 0.45

0.4
0.25
4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 18: Standard Deviation of Female Earnings Growth in Norway

0
0

-0.5
-0.5
-1
Skewness of yt+1 − yt

Skewness of yt+5 − yt

-1.5 -1

-2
25-29 -1.5 25-29
30-34 30-34
-2.5 35-39 35-39
40-44 40-44
-2
45-49 45-49
-3 50-54 50-54

-3.5 -2.5
0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 19: Skewness of Female Earnings Growth in Norway

18
 0.2
0.2

0.15 25-29
0.1
30-34
35-39
0.1 40-44
Kelly Skewness of yt+1 − yt

Kelly Skewness of yt+5 − yt

45-49 0
0.05 50-54

-0.1
0

-0.05 -0.2 25-29

30-34
-0.1 35-39
-0.3 40-44
45-49
-0.15
50-54
-0.4
-0.2
0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 20: Kelly Skewness of Female Earnings Growth in Norway

0.5

25-29 0.65 25-29

0.45 30-34 30-34
35-39 0.6 35-39
Standard Deviation of yt+1 − yt

Standard Deviation of yt+5 − yt

40-44 40-44
0.4 45-49 45-49
0.55
50-54 50-54

0.35 0.5

0.45
0.3
0.4

0.25
0.35

0.2 0.3

4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 21: Standard Deviation of Female Gross Income Growth in Norway

19
 0.2
0.2 25-29 25-29
30-34 30-34
0.15
35-39 35-39
40-44 40-44
Kelly Skewness of yt+1 − yt

Kelly Skewness of yt+5 − yt

0.15
45-49 0.1 45-49
50-54 50-54
0.1 0.05

0
0.05
-0.05

0 -0.1

-0.15
-0.05

-0.2
0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 22: Kelly Skewness of Female Gross Income Growth in Norway

0.6

25-29 25-29
0.4 30-34 0.55 30-34
35-39 35-39
Standard Deviation of yt+1 − yt

Standard Deviation of yt+5 − yt

40-44 40-44
45-49 0.5 45-49
0.35 50-54 50-54

0.45

0.3
0.4

0.25 0.35

0.3
0.2

4 8 12 16 20 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 23: Standard Deviation of Female After Tax Income Growth in Norway

20
 0.2
0.2
25-29 25-29
30-34 0.15 30-34
35-39 35-39
0.15 40-44 40-44
Kelly Skewness of yt+1 − yt

Kelly Skewness of yt+5 − yt

45-49 0.1 45-49

50-54 50-54
0.1 0.05

0
0.05

-0.05

0
-0.1

-0.15
-0.05
0 4 8 12 16 20 0 4 8 12 16 20
Percentiles of Recent Earnings (RE) Distribution Percentiles of Recent Earnings (RE) Distribution

Figure 24: Kelly Skewness of Female After Tax Income Growth in Norway

21
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, et al. (2015). Imputing consumption from Norwegian in-

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, , and Song, J. (2015). What Do Data on Millions

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 Ozkan, S.
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22