Employment time and the cyclicality of earnings growth

We study how the distribution of earnings growth evolves over the business cycle in Italy. We distinguish between two sources of annual earnings growth: changes in employment time (number of weeks of employment within a year) and changes in weekly earnings. Changes in employment time generate the tails of the earnings growth distribution, and account for its procyclical skewness. In contrast, the distribution of weekly earnings growth is close to symmetric and stable over the cycle. This suggests that studies of earnings risk should carefully model the employment margin to avoid erroneous conclusions on the nature and magnitude of risks underlying individual earnings. We show that the combination of simple employment and wage processes is enough to capture the complex features of the earnings growth distribution.