Household Income and Volatility in Germany

Household Income and Volatility in Germany

The German labor market is characterized by strong institutional stabilizers and long-term employment relationships, suggesting a high degree of income predictability. Using a large transactional dataset of over 40,000 German bank accounts, we investigate month-to-month income dynamics. We develop and validate a novel methodology to decompose monthly inflows into a stable and a transitory component in order to distinguish between fundamental shocks to long-term earnings and temporary fluctuations. We find that German households, despite institutional protections, face significant monthly income volatility, a risk masked by annual data. This volatility is mainly driven by transitory shocks which are highly heterogeneous: high-income households experience large, infrequent shocks consistent with performance pay, while low-income households face more frequent shocks indicative of unstable employment. Our findings provide the first high-frequency estimates of permanent and transitory income risk for Germany, offering important parameters for the calibration of macroeconomic models.       ​​