Inequality and income losses in the recession: It’s all about lost work
Sometimes, it’s worth documenting the obvious. A recession causes income losses for families pretty much across the board, but much more so the lower your income. That is, a recession drives up inequality between the top and the middle and the middle and the bottom. The primary driver of this inequality is that unemployment and reduced work hours hits those with low and middle earnings the hardest. We can see that by looking at changes in family incomes along with changes in their earnings and work hours, as we do by income in the figure below for families with children (under 18 years old).
Remember, income includes all the sources of income a family receives, such as: transfer income (e.g., unemployment compensation); dividend, interest or rental income; or earnings. Plus, a family’s earnings depend upon how many people in the family work, how much they work in a year (weeks per year and hours per week) as well as the level of their hourly wages.
The income losses from 2007 to 2010 were pervasive with those in the upper fifth losing 4.3 percent and larger (6.6 percent) losses in the middle and much larger losses (11.2 percent) for the bottom fifth. This is well known, or should be. This inequality is driven by the difference in reduced working time, as family work hours shrunk by 14.0 percent, 11.9 percent and 4.3 percent, respectively, for families in the lowest, middle and upper fifths. Not surprisingly, the pattern of reduced family earnings across income fifths corresponds to that of reduced work hours.
The implications are straightforward. Policies which generate jobs and greater work hours are key to reversing the income declines. Doing so is imperative for the broad middle class but will be especially important for the lowest income families who have seen their work opportunities and their incomes fall the most.