Household Earnings and Income Volatility in the UK, 2009–2017

We study the volatility of sources of individual and household level income in the UK in the years 2009-2017, following the Great Recession and government austerity. We find that the volatility of (pre-tax) earnings and disposable income has fallen for the working-age in this period, largely due to fewer negative and large earnings shocks. For older individuals, we also find a fall in the volatility of private income, mainly due to fewer positive and large income shocks. Taxes and transfers help stabilise incomes, with social security cash benefits and income-dependent refundable tax credits reducing household private income volatility by around a quarter for the working age, and 40 percent for those aged 60 or over. However, over the sample period, taxes and benefits became less well correlated with earnings, reducing their ability to counteract swings in labour income. The findings illustrate the consequences of fiscal retrenchment and the cut-backs to welfare benefits on the stability of incomes.

Hedging on the Hill: Does Political Hedging Reduce Firm Risk?

We examine whether firms’ political hedging activities are effective at mitigating political risk. Focusing on the risk induced by partisan politics, we measure political hedging as the degree to which firms’ political connections are balanced across Republican and Democratic candidates. We find that greater political hedging is associated with reduced stock return volatility, particularly during periods of higher policy uncertainty. Similarly, greater political hedging is associated with reduced crash risk, investment volatility, and earnings volatility. Moreover, the reduction in earnings volatility appears to relate to both a firm’s taxes and its operating activities, as we find that greater political hedging is associated with reduced cash effective tax rate volatility and pretax income volatility. We further find investors are better able to anticipate future earnings for firms that engage in political hedging, suggesting that political hedging helps improve firms’ information environments. Lastly, we perform an event study using President Obama’s Clean Power Plan. We find that on the days this policy proposal was debated in Congress, energy and utility firms experienced heightened intraday return volatility (relative to other firms and nonevent days). However, this heightened volatility is mitigated for energy and utility firms that are more politically hedged. Overall, we conclude that political hedging is an effective risk management tool that helps mitigate firm risk. This paper was accepted by Suraj Srinivasan, accounting.

THE ROLE OF CAP RISK MANAGEMENT IN INCOME STABILISATION: EMPIRICAL EVIDENCE OF IST IN SLOVAKIA

In the European Commission (EC) proposals for the Common Agricultural Policy (CAP) post2020 is emphasized the aim to better support the resilience of agricultural systems in the European Union (EU). This resilience is based on the concern that the agricultural sector should be supported in responding to current and future economic, societal, and environmental challenges and risks. Managing risk in farming includes number of activities and strong effort of farms and policy makers. One part of risk management refers to income stabilisation, aimed at decreasing the unstable financial situation and high level of income volatility in European agriculture. In the EU, every year at least 20% of farmers experience an income loss of more than 30% compared with their average income in the three previous years. The public instruments to mitigate the income risk of farmers included under the Pillar II (insurance premiums, mutual funds, and the Income stabilisation tool) have been implemented only by very low number of EU countries. In the paper, we analyze the ability to decrease the instability of Slovak farmers with the use of Income stabilisation tool of CAP. The Income stabilisation tool (IST) can be used to indemnify the farmers, who experienced a “severe drop” in income, reflecting the income loss of more than 20% or 30% compared to the 3-years average annual income, or the 5-years average annual income, excluding highest and lowest entry (Olympic average). The IST has not been used in the Slovakia, or any other European country operationally so far.

The Economic Well-being of Farm Households in Germany

In this study, we explore the economic well-being of farm and nonfarm households in Germany. We applied an indicator that combines households' disposable income and net wealth consisting of financial assets and real estate to data from the Income and Consumption Survey (EVS) 2018. We found that the income available to farm households can support a standard of living equal to that of nonfarm (employed) households. Wealth affects households' economic well-being in both directions: farm households and workers/employees would be better off if their household income would assess their economic status. The opposite trend occurs for unem-ployed and pensioners/retirees. However, the analysis of farmers' well-being requires income data of multiple years regarding the income volatility of self-employment in agriculture. Consid-ering wealth to assess farm households' economic well-being means paying attention to their farm assets because they are highly intertwined with the household. The EVS misses farm char-acteristics and a reliable number of farmers' observations to assess their economic well-being over time to derive agricultural policy implications. Hence, there is currently a lack of statistical data and evidence to achieve the Common Agricultural Policy (CAP) 's second objective to pro-vide income support in a targeted manner.

The Role of Income Volatility and Perceived Locus of Control in Financial Planning Decisions

Two studies examine whether income volatility might lead to greater personal financial insecurity and might create a decision environment that discourages planning ahead on personal finances. In Study 1 (N = 982), participants who reported more month-to-month variability in their actual income were less likely to have planned for financial contingencies. A lower internal locus of control partially mediated the link between volatility and financial planning decisions in Study 1, and lower internal locus of economic control predicted financial planning decisions independently of volatility. In Study 2 (N = 149), participants who were randomly assigned to receive volatile (vs. stable) payments in a simulated work environment were less likely to save their compensation for this work. Again, lower internal locus of economic control predicted financial planning decisions independently of volatility. This is the first study to demonstrate a causal link between income volatility and financial decisions, specifically a heightened tendency to make short-term financial decisions. Both studies also underlined the importance of internal locus of control for financial planning decisions.

The rise of self-employment in the UK: entrepreneurial transmission or declining job quality?

The UK has experienced very significant growth in self-employment since the financial crisis. The self-employed are at higher risk of income volatility while facing lower levels of social insurance. Individual transitions into self-employment may be driven by a range of factors, both ‘pull’ and ‘push’. This paper proposes a re-evaluation of the evidence on whether private sector business organizations stimulate entrepreneurial transmission amongst their employees. In the UK context rising self-employment may reflect the consequences of flexibilization and falling job quality, rather than outright job loss. Previous research has focused mainly on the subjective notion of job satisfaction to identify the level of attachment the future self-employed have to their current employer. Quantitative analysis is undertaken using large scale British longitudinal survey data. The paper extends this work to show that organizational (dis)attachment is evidenced in a range of extrinsic indicators of job quality, providing explanatory information beyond intrinsic job satisfaction. Specifically, the paper shows that the impact of training on self-employment entry depends asymmetrically on the source of that training. Finally, the paper argues that reduced attachment provides an alternative explanation for any ‘entrepreneurial transmission’ effect, through which employees, particularly those in smaller organizations, are more likely to enter self-employment. However, anticipated improvement in the experience of work from choosing self-employment is seen to be somewhat illusory, speaking to growing concerns about the impact of the growth of the gig economy.

Longitudinal Links between Income Dynamics and Young Adult Socioeconomic and Behavioral Health Outcomes

Longitudinal links between childhood family income and adult outcomes are well documented. However, research on childhood income volatility and young adult outcomes is limited. This study utilizes data from the NLSY ( N = 6,410) to examine how childhood family income and income volatility relate to socioeconomic outcomes and mental/behavioral health in emerging adulthood. Results show that lower childhood income was associated with young adult socioeconomic and behavioral health outcomes. Higher income volatility was associated with increased depression and teen parenthood during young adulthood. Additional analyses examining trajectories of income volatility illustrated that children in families with unstable income trajectories (i.e., frequent income losses and gains) showed higher depression scores than those with stable trajectories. These findings suggest that income volatility, not just income level or income loss, is important to consider when studying economic disparities in young adult outcomes. Implications for policies and programs for low-income, high-volatility households are discussed.