Labor Income Shocks Along the Business Cycle

Labor Income Shocks Along the Business Cycle

This paper analyzes the determinants of labor income shocks along the business cycle. My main finding is that sorting between firms and workers is a key component of idiosyncratic risk. Labor income shocks are analyzed through the lenses of a dynamic search-and-matching model, which I estimate using US data. Because of search frictions and mismatches between firms and workers, the laissez-faire equilibrium is not necessarily optimal. My results underline that the government can tame business cycle fluctuations by designing a simple unemployment insurance scheme improving sorting between firms and workers.