Earnings Instability

This paper uses high-frequency administrative data to show that the majority of U.S. workers experience substantial month-to-month fluctuations in pay, even within ongoing employment relationships. This earnings instability is pervasive, but it has been masked in past analysis of annual data. Moreover, this instability is unequally distributed: lower-income, hourly workers face more instability than higher-income, salaried workers. This is because earnings instability arises in large part from firm-driven fluctuations in hours. This earnings instability is a meaningful source of economic risk: we provide causal evidence that it increases consumption volatility and also leads to greater job separations, and we find that workers have a high willingness to pay to reduce earnings instability. These findings suggest that short-term earnings risk is a significant and previously underappreciated feature of the labor market.