Channels of Wage Income Smoothing: United States 1963-2010

Abstract

In this paper, adopting the framework of Asdrubali, Sorensen and Yosha (1996), I identity three channels of wage income smoothing: net taxes, employers, and interstate commuting income. They smooth 1.8%, 55.1% and 3.0%, respectively, of shocks to Gross State Product (GSP). 40.1% of shocks are not smoothed. I split the sample into four non-overlapping time periods and the shares of net taxes on production and employers change significantly over time. Lastly, I test the asymmetry of wage income smoothing over the business cycle. The responses of wage incomes to GSP shocks exhibit a reversed "rockets and feathers" feature, i.e. wage incomes respond stronger and faster to negative shocks than positive shocks.