The Nature of Countercyclical Income Risk
During the last two recessions, the top 1 percent of earners saw bigger income drops than all other groups.
During recessions, most individuals' incomes don't fluctuate much more than they do in good economic times -- the vast majority of wage earners experience the same small ups and down in income that they always do. What changes in an economic contraction are the nature of big fluctuations in income, according to The Nature of Countercyclical Income Risk (NBER Working Paper No. 18035) by Fatih Guvenen, Serdar Ozkan, and Jae Song. Large increases in income are less likely, and large drops in income become more likely.
In the recessions of the 1980s and 1990s, lower income individuals were more likely to experience negative shocks to income than their higher-income counterparts. In contrast, during the last two recessions, the top 1 percent of earners saw bigger income drops than all other groups, even the bottom 10 percent of earners.
The authors explain that: "for the first two recessions in our sample period, very-high-income individuals fared better than anybody else in the population, whereas for the latest two recessions, there has been a remarkable reversal of these fortunes and the highest-income workers suffered the most."
The authors analyze a 10 percent sample of all male income earners in the United States, including those at the very top of the earnings distribution, from 1978 to 2010, using confidential Social Security data. Women were not included because their labor force participation increased during the period, which would have made the data more difficult to interpret.
The Great Recession trimmed the average American man's income by 6.5 percent, the steepest decline in the postwarperiod, according to the study. Of course there was wide dispersion in the changes in income over this period. One in ten saw income rise more than 65 percent; another one in ten saw it fall more than 55 percent. And while the average income declined between 2007 and 2009, the median income was nearly constant.
This wide dispersion of fortunes, together with the gap between the average and median income change, suggests that it is difficult to generalize about overall changes in the economy. Contrary to previous research, this study did not find that income changes were greater during recessionary periods. Instead, it found that large income changes, on balance, become more negative than positive during these contractions.
This study also found a close relationship over time between income of the top 0.1 percent and GDP growth and unemployment. Every 1 percentage point rise in male unemployment led to an average 6.9 percentage point decline in income for these earners at the very top. And, every 1 percentage point slowdown in GDP growth implied a 4.5 percent decline in their income.
--Laurent BelsieThe Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.