The Rising Instability of American Family Incomes

[Pale Blue Dot]

Most Americans are aware that income inequality has increased in the last 30 years. Less well known is that income instability—how much families' incomes fluctuate up and down over time—has also grown substantially.

The main results reported in this brief are:

* The instability of family incomes has risen substantially over the last three decades. Although the precise magnitude of the increase depends on the approach to measuring income variance that is used, we estimate that short-term family income variance essentially doubled from 1969-2004. Much of the rise in income volatility occurred prior to 1985, and volatility dropped substantially in the late 1990s. It has, however, risen in recent years to exceed its 1980s peak.

* The proportion of working-age individuals experiencing a large drop in their family income (50% or greater) has climbed more steadily—from less than 4% in the early 1970s to nearly 10% in the early 2000s. The probability of large income drops varies predictably with the business cycle. Yet it has also trended strongly upward over time. For instance, the 2001 recession, which was mild in macroeconomic terms, was associated with a higher chance of large income drops than the recession of the early 1980s, which was the worst economic downturn since the Great Depression.

* There is an important distinction between family income (total earnings, asset income, and transfer income for all members of a family) and individual earnings. While the instability of individual male workers' earnings rose sharply between the 1970s and 1980s, it has been more or less stable since then, trending up and down with the business cycle through the 1980s and 1990s, and rising again in the early 2000s. This basic trend—a rise in earnings variability in the 1970s, little clear trend from the early 1980s to the late 1990s, and an upswing in the early 2000s—has been confirmed by numerous analyses, including a recent study by the Congressional Budget Office (CBO). Moreover, this same basic pattern can be seen in data from both the survey-based Panel Study of Income Dynamics (PSID) (which is used in this brief) and the administratively collected Continuous Work History Sample (CWHS) of the Social Security Administration (used by the CBO).

* Contrary to assertions in the popular press, women's increased workforce participation has not been a major factor contributing to the rise in family income volatility. Female earnings have, if anything, become more stable since the 1980s. Male workers have experienced a larger and more sustained rise in earnings instability. Because men's earnings account for a larger percentage of total household income than do women's earnings, on average, rising instability in male earnings helps account for the increase in family income volatility. In short, the stabilizing influence on family income of the decrease in female earnings instability is overwhelmed by the rise in men's earnings instability.

* In addition to the increase in male earnings variability, other likely causes of rising family income volatility include the growing variability of cash transfers and the limited cushioning effect of having a second earner in the household. Although the evidence is limited, there is reason to believe that a second family earner is less of a benefit in terms of income protection today than it was prior to the 1990s. Indeed, in 2004, if a male worker's earnings fell, on average his spouse's earnings fell as well, exacerbating, rather than offsetting, the loss.

* While less educated and poorer Americans have less-stable family incomes than their better-educated and wealthier peers, the increase in family income volatility affects all major demographic and economic groups. Indeed, Americans with at least four years of college experienced a larger increase in family income instability than those with only a high-school education over the past generation, with most of the rise occurring in the last 15 years.

* Finally, levels of family income volatility appear to be extremely high. Family income drops of 50% or greater affected nearly one in 10 non-elderly adults during the early 2000s. Meanwhile, earnings in the United States are also quite variable. The CBO's recent analysis of earnings variance using the CWHS suggests that around 15% of workers experience a drop in their earnings of 50% or greater every year—a level comparable to what we find using the PSID.

http://www.epi.org/content.cfm/bp213

Much more at the link.

[truedelphi]

1. I feel that much of this is over my head, but I do find it of comfort that

Someone in the ivory towers is looking at this.

And some of it is not surprising. For instance, the stock crash of 1987 was a bigger economic event than the stock downturn after the Nine Eleven event. But whereas a stock market crash immediately affects only the investing class, a different story played out after Nine Eleven. The Nine Eleven event, especially with it bringing the transportation sector to a halt, severely hurt small and mid-sized businesses.

Both my son and myself were laid off when the planes stopped flying in 2001. He was working for a company that had just refused a 5 million dollar influx of money - his boss, the company owner, wanted the company to be run without outside interference. But when the guy couldn't ship computers - the company couldn't pay its bills. Their former willing creditor had also been impacted by Nine Eleven, and the company folded.

The company I was with had just given me an excellent sixty day review, and put me on fast track to be permanently hired. Nine Eleven happened, and since the business was a mail order concern, they immediately laid off everyone they had hired even up to six months before.

Neither one of us worked for a business anywhere near New York City. My company was in California - his was in Chicago.

[GoesTo11]

2. Bottom line: Too much risk effectively makes us poorer

Overall, we have an average income of almost $40K. If everyone just got that, a couple would have $80k, a household of 3 would have $120k, of 4 would have $160k. You get the idea, 300 million pretty comfortable people. As it is, instead, we have some very comfortable and some not comfortable at all. But on average, we with our risk are as comfortable as a country with per capita income of $20k evenly distributed to everyone. Of course, there's a lot of economic theory about incentives to work hard, let alone to innovate, that says if the state just completely redistributed wealth, we wouldn't even be close to 20k. But this gives you an indication of the cost of risk. A lot of people work like dogs to make as much as they can not because they need that extra money, but because they're afraid of what will happen if they lose their jobs or if they have that medical crisis or divorce. Because you can't really insure against it, you're no better off making 100k with all the risk than you are making 50k as a sure thing.

[raccoon]

3. Come on, DU'ers, let's get this on Greatest! Rec'd. nt

[raccoon]

4. Kick. nt

[Karl_Bonner_1982]

5. I support "wage insurance"

With family incomes and hourly pay both becoming more volatile, many economists have suggested wage insurance as a way to smooth over the bumps. Basically, everyone would contribute a small fraction to a pool that is used to pay workers who are compelled to accept a lower wage when their old job disappears. Net incomes would still not be completely stable, but this could act as a shock absorber.