Austin Nichols, coauthor of "America Insecure: Changes in the Economic Security of American Families," answers five questions about how family incomes are becoming more precarious and unpredictable. The recession dealt a major blow to Americans' economic security, but the risk that a family's income could fall abruptly had already been on the rise for years.
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September 1, 2010
1. How has Americans' economic security changed?
Over the past 30 years, family incomes have been rising at a steady clip. But, at the same time, individual household incomes have become more unstable, and the chance that families will suffer income setbacks has gone up. So the real story isn't about whether median income is increasing or decreasing, it's about the widening gap between the rich and the poor and the volatility of incomes over time.
People often underestimate the risk they face. The risk of a plane crash is minimal, but often taken too seriously. The risk of a big income drop, however, is real and substantial, but people still spend as if their incomes will go up continuously. They do a straight-line projection when planning their financial futures, without preparing for the very real possibility that their incomes will fluctuate. The risk of experiencing an income drop was pretty high even in the boom periods of the 1990s and the early 2000s, but in the past couple of years that risk has probably increased by about a third.
More than one in eight adults in families with children has a 50 percent or greater drop in family income in a year. For some, this loss is short-lived, but three in five families don't recover that lost income within a year. More than one in five of these families are still down by half for more than a year. And the recession's damaging effects only make things worse. The data to show that aren't available yet, but we can tell that the probability of experiencing a substantial income drop is at a 10-year peak for low-income families.
2. Do all families face the same risk?
Risk distribution has a U shape. Those in the bottom fifth and the top fifth of the income distribution have higher risks of losing income than those in the middle. If you're poor, then a smaller change in your income can mean a big percentage loss. And the poor generally have less stable jobs. If you're a high-earner and lose your high-paying job, you're less likely to recover the same level of pay.
In our paper, we show that low-wage earners have a better chance of recovering from a 50 percent or more drop in income than high earners. If you're earning $20,000 a year, it's easier to go out and find another job at that same salary than it is if you're making $200,000 a year.
"MORE THAN ONE IN EIGHT ADULTS IN FAMILIES WITH CHILDREN HAS A 50 PERCENT OR GREATER DROP IN FAMILY INCOME IN A YEAR. FOR SOME, THIS LOSS IS SHORT-LIVED, BUT THREE IN FIVE FAMILIES DON'T RECOVER THAT LOST INCOME WITHIN A YEAR."
The prevalence for a big income drop peaked for high-income families (those in the top fifth) in 2001; the peak for low-income families in the bottom fifth was in 2009.
3. Why have volatility and inequality gone up?
Nobody knows for sure. Risk has increased in every aspect of adults' lives. Marriages, jobs, whole industries are all less stable. Corporations are bigger and primarily concerned about the bottom line. You don't keep 20 workers on board when it hurts your bottom line now. In the 1960s, huge manufacturing firms dominated the economy and unionization was at an all-time high. It wasn't so easy then to transfer risk from the company portfolio to employees.
But let's not heap all the blame on just large organizations. Risk is pervasive—it's increased throughout the economy and throughout people's lives since the post-war period.
We have a lot of risks that have gotten smaller over time, too, so perhaps we can tolerate other risks more, or even seek out more risk (like folks who drive faster when forced to wear seatbelts).
4. How has the recession affected family incomes? Are things worse than in previous recessions?
Huge numbers of jobs have been lost in the recession that began at the end of 2007, so family earnings have become hyper-volatile. This recession probably relates most closely with the 1980–82 recession, when job losses were also very high. After that recession, once the high unemployment of 1982 and 1983 faded away, we had almost two decades of sustained growth, with a couple little blips along the way. The 1990s in particular were a very good period. Poverty rates dropped for several reasons and the job market was strong. It's unclear whether we'll have the same experience this time, but at least it provides some hope that you can dig your way out of a recession. That's not to say it won't be painful, but it will happen.
5. Can we do anything to change the underlying risk and help families who have experienced these income swings?
We need to get lost jobs back, but we also need policies that will help tide people over when they have income setbacks. Our safety net is supposed to do that. The Food Stamp program (now known as the Supplemental Nutrition Assistance Program) has been pretty successful, but TANF (Temporary Assistance for Needy Families) and our disability programs haven't proven as effective at tiding people over when they need temporary help.
Government can help lower aggregate risk by giving people incentives to save more money and get better educated. Individuals can better protect themselves by recognizing that the economy has changed. If you are highly skilled, you're better protected against income fluctuations. If you have saved some money, income losses aren't as traumatic.
As for the underlying risk, I don't think there's any way to stop that. We can't stop globalization, and it wouldn't be a good idea anyhow. We can't go back to the way our workforce operated in the 60s. People need to face up to the increased risk and prepare for it. We have an increased risk of hurricanes too, and we're not going to fix that. You can only be better prepared.
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