The Bank of England published Staff Working Paper No. 1,129 by Marco D’Amico and Martina Fazio setting out a tractable, parametric approach to modelling UK labour income risk using administrative-quality earnings data. The paper documents how the distribution of earnings growth changes over the business cycle and proposes a model designed to be embedded in broader macroeconomic frameworks, including heterogeneous-agent models, to support policy scenario analysis. Using the Annual Survey of Hours and Earnings (ASHE) panel (1975–2023) based on HM Revenue and Customs Pay As You Earn records, the authors find a sharply peaked earnings growth distribution with long, heavy tails and business-cycle variation that is concentrated in skewness rather than dispersion. In the data, the standard deviation of income shocks is broadly acyclical, while Kelley’s skewness is procyclical and turns more negative in downturns, implying large negative earnings shocks become more likely in recessions. The estimated income process combines a “persistent plus transitory” structure with a non-employment transitory shock and a mixture-of-normals persistent shock whose time-varying means are driven by GDP growth and changes in unemployment, and it is calibrated via simulated method of moments to match cross-sectional tail and kurtosis properties as well as the time-series behaviour of skewness; the paper also reports no evidence that lower-income households are disproportionately more likely to experience negative shocks during recessions.
Bank of England 2025-05-30
Bank of England staff paper develops a parametric model of UK income risk dynamics for scenario analysis
The Bank of England's Staff Working Paper No. 1,129 details a parametric approach to modeling UK labour income risk using earnings data from 1975 to 2023. The study finds earnings growth distribution is sharply peaked with long tails, and business-cycle variations are concentrated in skewness rather than dispersion. The model, designed for macroeconomic frameworks, shows large negative earnings shocks are more likely in recessions, but lower-income households are not disproportionately affected.