Individual recoveries after earnings shocks

We explore the ebb and flows of earnings shocks by tracking a 10% sample of Australian tax filers (ALife data set). We capture all years an individual files a tax return dating back to 1990/91.

An earnings shock is defined as experiencing a greater than 40% drop in earnings between a given year and the minimum earnings in the previous two years. Our analysis allows us to better understand the time it takes to recover to pre-shock earnings compared with the trajectory of those who do not experience a shock.

The path to recover is slow for most individuals. Many have not recovered by the end of a seven year period.