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Earnings Volatility and its Consequences for Households
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- Danielle Venn1
- Author Affiliations
- 1: OECD, France
- 07 oct 2011
- Bibliographic information
Many workers experience large fluctuations in before-tax labour earnings from one year to the next, due to changes in working hours, movements in and out of work and changes in pay. Youth entering the labour market and workers in non-standard jobs (such as temporary employment or self-employment) are the most likely to experience both large increases and large decreases in earnings. Other workers, such as those with a low level of education, poor health or approaching retirement, have only an increased chance of experiencing a large drop in earnings. It is often difficult for workers to predict changes in earnings and assess whether these are temporary or permanent. Additionally, private insurance and financial markets are poorly equipped to protect households against earnings fluctuations. Large drops in individual earnings are associated with an increased risk of household poverty and financial stress, with the impact largest in the poorest households. Tax and welfare systems can help buffer households against volatile earnings. Taxes play a prominent role in reducing the impact of earnings fluctuations among full-time workers, while transfers such as unemployment benefits and social assistance are more important when volatility is due to movements into or out of work.