Principal investigator: Omar Barroso Khodr
Authors: Mariacristina De Nardia, Giulio Fellab, Marike Knoefc, Gonzalo Paz-Pardod, Raun Van Ooijene
Original title: Family and government insurance: Wage, earnings, and income risks in the Netherlands and the US
Location of the Intervention: United States (USA) and Netherlands
Sample Size: 95.000 individuals (Netherlands) and 18.000 individuals (USA)
Primary Variable of Interest: Gross individual earnings are defined as the total compensation received by an employee in a given year, which includes their social security contributions.
Type of Intervention: Redistribution and social welfare policies.
Methodology: Method of Moments (Arellano et al., 2017); Kelley's Skewness; and, Crow-Siddiqui Kurtosis Measure
Summary
This study documents new findings on the risk associated with male wages and income, family income, and pre- and post-tax income in the Netherlands and the United States. According to the authors, in both countries, incomes exhibit significant deviations from traditional assumptions of linearity and normality. Individual risk related to male wages and income is relatively high at the beginning and end of working life, as well as among individuals in the lower and upper income brackets. Hours worked are the main factor responsible for negative skewness and, to a lesser extent, for high kurtosis in income variations. Although the authors found no evidence of effects from additional workers, the presence of conjugal income contributes to reducing the variability of family income compared to that of male income. In the Netherlands, government transfers represent an important source of protection, substantially reducing the standard deviation, negative skewness, and kurtosis of income variations. In the United States, the role of family insurance is considerably more relevant than in the Netherlands. Both family and government insurance policies help to mitigate, although they do not completely eliminate, the non-linearities in families' disposable income across age and in relation to previous earnings.
- Policy Problem
According to the authors, there are several relevant policy issues related to how families and governments manage the risks associated with wages and income. They point out that one of the central issues concerns the adequacy and design of the social safety net. The study reveals that, in the Netherlands, government transfers are an important source of social security, contributing significantly to mitigating the volatility, negative asymmetry, and kurtosis of income variations. This finding highlights a crucial policy question about the effectiveness of public programs—such as unemployment insurance, social assistance, and other transfers—in protecting families against the financial consequences of income declines, which are frequent and do not follow a normal distribution. The contrast with the US, where the government's role is more limited, underscores that the size and structure of the welfare state are fundamental policy choices with direct impacts on the economic security of families.
Furthermore, the authors highlight the distribution of risk across the population and the life cycle as a key concern for the development of targeted policies. They observe that the risk of income loss is especially high among individuals at the beginning and end of their working lives, as well as among those in the lower and upper income brackets. This finding suggests a potential problem with standardized social security systems, indicating the need for policies that are more sensitive to demographic and economic variations. For example, different forms of support or insurance may be more suitable for young people entering the workforce, more experienced workers, and low-income individuals.
Finally, the research raises an important political question: Identify the main source of income instability.The belief that hours worked are the main factor in the negative asymmetry of income variations—and not wages—shifts the focus of public policies. This indicates that the most significant risks are related to unemployment, underemployment, and the volatility of working hours. Thus, policies focused exclusively on wage floors, such as the minimum wage, may be insufficient. Conversely, measures that promote stability in working hours—such as unemployment insurance, reduced working hours programs, and regulations on unpredictable schedules—become essential to mitigate the most severe forms of income loss faced by families.
- Policy Implementation Context
According to the authors, the context in which public policies are implemented is fundamental to deepening the understanding of income risk and protection mechanisms. The research explicitly investigates the role of tax systems and government transfers as primary instruments for protecting families against income fluctuations.
The study finds that, in the Netherlands, the welfare state plays a predominant role. The analysis reveals that “taxes and, in particular, the transfer system play an even greater role in reducing income risk” than family insurance mechanisms. This conclusion is reinforced by a direct comparison with the United States, which has a more limited welfare state and a less progressive tax system. The international comparison shows that, although family insurance is more relevant in the US, “in the Netherlands the government is responsible for the largest share of income risk reduction” (Guvenen et al., 2015; Arellano et al., 2017).
Furthermore, the study's methodology—which distinguishes between wage variations and changes in working hours—has direct policy implications. The finding that "hours are the main factor of variability" for low-income individuals suggests that policies aimed at stabilizing income, such as unemployment insurance or reduced working hours programs, are especially relevant for this group. The authors also note that "specific institutional characteristics of each country are determinants in establishing whether wages or hours represent the main margin of adjustment," implying that public policy itself shapes the nature of income risk faced by individuals.
Finally, the article positions its findings as strategic inputs for policymakers, stating that a precise understanding of higher-order income shocks is essential for designing "ideal social security and taxation." By offering detailed data on how income risks manifest and are absorbed by government systems, the study provides a solid empirical basis for evaluating and developing public policies aimed at economic stabilization and social protection.
- Evaluation Details
The study's analysis is based on two main data sources for the Netherlands and one for the United States, selected for their complementary strengths. For the Netherlands, researchers combine administrative tax records from the Income Panel Study (IPO) with payroll data from payroll administrations (DPAs). The IPO offers a representative sample of 1% of the population—approximately 95 individuals and their families—from 2001 to 2014. Among its main advantages are the high quality of the data, with minimal measurement error thanks to third-party verification, very low turnover (except for deaths or migration), and a unique perspective at the household level.
Essentially, the authors conduct a detailed analysis of labor income, taxes, and government transfers to all members of the household, which is crucial for evaluating family and state protection mechanisms. Meanwhile, DPA data, required by law in the Netherlands, provides accurate records of hours and days worked, directly reported by employers.
Although data after 2006 are complete, earlier records required methodological adjustments, such as standardizing work weeks by sector and applying a limit to full-time hours. For international comparison purposes, the study uses data from the United States from the Panel Study of Income Dynamics (PSID), covering the period from 1968 to 1992. Later years were excluded due to the reformulation of the survey and the change to biennial data collection. The researchers also conducted robustness checks to ensure that the differences observed between countries are not a result of different sampling periods or data sources used.
- Method
The study's methodology is based on an empirical analysis designed to investigate different mechanisms of insurance against economic shocks. Thus, the central approach involves comparing income variability at different levels: individual male wages and earnings, total household income, and net (disposable) household income. According to the authors, the comparative framework is fundamental to the analysis, as it allows for the isolation of specific insurance mechanisms. Fluctuations in an individual's wages relative to their total income reveal the capacity for "self-insurance" through adjustments in personal labor supply. Differences between individual and total household income shed light on "family insurance" through the spouse's labor supply. In this way, comparing household income before and after taxes and transfers clarifies the role of "government-provided insurance."
To capture complex risk patterns, the study looks beyond simple variance and analyzes the distribution of one-year changes in the logarithm of each income variable. These changes are examined across different age ranges and percentiles of the previous year's male income distribution. The methodology closely follows established practices in the literature on “high earnings risk” in terms of sample selection, variable definitions, and data processing. The sample is restricted to working-age men (25-60 years) with a minimum level of annual labor income and excludes the self-employed to focus on a consistent and relevant population.
In this way, the variables are constructed to flow from individual to household resources. Individual gross incomes are defined as total annual earnings. These are aggregated for all members of the household to create gross household income, which is then adjusted by adding savings income to obtain pre-tax income. Household disposable income is calculated by subtracting income tax and adding government transfers. To isolate idiosyncratic shocks, the data are purged of the general effects of age and time using regression residuals that control a quadratic polynomial on binary age and year variables.
Finally, the study employs a comprehensive set of statistical moments to describe the distribution of changes in income. This includes not only second-order moments (variance) but also higher-order moments and, crucially, quantile-based measures of skewness and kurtosis. The researchers justify the use of these quantile-based measures (Kelley skewness and Crow-Siddiqui kurtosis) because they are more robust to outliers and easier to interpret than standardized centered moments, although the latter are also reported when they provide a qualitatively different picture. This allows for a differentiated analysis of skewness and tail risks in income fluctuations.
- Main results
The study identifies significant differences in economic risks and protection mechanisms between the Netherlands and the United States. A relevant finding is that variables such as wages, hours worked, and income exhibit considerably greater volatility (measured by standard deviation) in the US compared to the Netherlands. Furthermore, the dynamics of income differ between the countries: in the United States, wages and income vary more synchronously, suggesting that wages themselves adjust more frequently. In the Netherlands, however, income variation is more closely associated with hours worked, especially among low-income workers.
Hours worked also stand out as the main factor contributing to negative asymmetry—that is, the occurrence of large drops in income—and to high kurtosis, which indicates the presence of extreme variations in earnings in both countries.
Regarding insurance mechanisms against these risks, the study highlights the distinct roles played by families and the government. In the United States, marital income plays an important role in smoothing out the volatility of male income and reducing negative asymmetry. In the Netherlands, on the other hand, intrafamily insurance mainly contributes to mitigating asymmetry, but only reduces income volatility in families where the husband is in the bottom third of the income distribution.
The most striking difference lies in the role of government insurance. While taxes and transfers contribute to reducing income variability and negative inequality in both countries, this effect is significantly stronger in the Netherlands, particularly among low-income families. Programs such as Disability Insurance (DI) and Unemployment Insurance (UI) prove especially effective for Dutch men with lower incomes.
The researchers conducted robustness tests to ensure that these patterns reflect real differences between countries, and not distortions caused by the data sources—administrative data in the case of the Netherlands, and survey data for the US—or by the periods analyzed. They conclude that the comprehensive role of the government in providing insurance in the Netherlands may reduce or even replace the type of intra-family protection that is more common in the United States.
- Lessons in Public Policy
This study offers an essential lesson on the effectiveness of different social protection models. The analysis reveals that, although economic volatility—especially in wages and hours worked—is a common phenomenon, the strategies adopted by societies to contain these shocks vary significantly and have profound implications. The main conclusion is that a robust welfare state, such as that of the Netherlands, is substantially more effective in reducing income volatility and, above all, in mitigating sharp declines (negative asymmetry), compared to models that rely predominantly on private mechanisms, such as that of the United States.
One specific lesson concerns the role of government in contrast to that of the family. In the US, where the state safety net is less comprehensive, spousal income becomes a crucial financial buffer. In the Netherlands, however, state intervention is so broad and effective that it replaces the need for this type of intra-family insurance, especially among low-income families. This suggests a trade-off between public and private insurance: robust government policies can relieve families of the responsibility of being each other's primary economic safety net.
In this context, the study highlights the value of well-formulated public policies. Income transfer programs, such as unemployment insurance and disability insurance, should not be seen merely as welfare measures, but as powerful instruments for macroeconomic stabilization at the individual level. Their effectiveness is particularly evident in the lower strata of the income distribution, demonstrating that such policies are fundamental not only to combat poverty, but also to guarantee economic security and predictability for the most vulnerable workers. In short, the choice between a welfare state and a model of less intervention results in radically different economic realities for citizens, especially in the face of adverse financial shocks.
Furthermore, the study offers a crucial lesson for public policy formulation: the importance of data quality and methodological transparency. The research shows that data prior to 2006, due to the normalization and limitation of working hours, presented a distorted view of the workforce, especially obscuring the extraordinary effort of full-time workers. The fact that the authors needed to make significant methodological corrections to build a consistent dataset reinforces a vital principle for statistical agencies: policy decisions based on inaccurate or inconsistent metrics can be compromised from the outset. Therefore, it is essential that public policies prioritize and invest in the collection of granular, frequent, and consistent administrative data, ensuring that the analysis underpinning laws and regulations is based on reliable foundations.
The study also demonstrates that seemingly secondary technical decisions in data collection can have significant implications for policy direction and evaluation. The limitation on recorded hours before 2006 rendered the overtime work of full-time employees invisible in official statistics. If a government were to develop a policy to compensate for excessive overtime or to regulate work-life balance, this limitation would have led to a misdiagnosis of the problem, compromising the policy's effectiveness. Thus, an important lesson for policymakers is to carefully examine the methodological details of the data used, ensuring that metrics directly reflect the phenomena they are intended to measure and influence—such as hours actually worked—rather than normalized or limited proxies.
Finally, the research offers a valuable lesson on resilience and policy validation. The researchers' ability to confirm their key findings with cleaner post-2006 data served as a robust "sensitivity check," demonstrating that the findings were not the result of distortions in the old data. This practice is directly applicable to public management: before implementing a large-scale policy, conducting pilot programs or retrospective validations with new data sources can prevent wasted resources and policy failure. The consistent alignment of results across different periods provides a model for how policymakers should seek independent validation for their assumptions, ensuring that policies are sound and that their observed effects are real.
References
Arellano, Manuel, Blundell, Richard, Bonhomme, Stéphane, 2017. Earnings and consumption dynamics: a non-linear panel data framework. Econometrica 85(3), 693–734.
Guvenen, Fatih, Karahan, Fatih, Ozkan, Serdar, Song, Jae, 2015. What do data on
millions of US workers reveal about life-cycle earnings risk?, Working Paper
20913, National Bureau of Economic Research.
