Tag: c-shaped recovery

“Earnings Shocks and Stabilization During COVID-19”

The other day, I put up a post arguing, on the basis of my analysis of the income data in the Current Population Survey, that the economic disruptions from the pandemic had not led to any reduction in real income for the lowest-income families. This is the opposite of the Great Recession, and presumably earlier recessions, where the biggest income losses were at the bottom. The difference, I suggested, was the much stronger fiscal response this time compared with previous downturns. 

My numbers were rough — tho I think informative — estimates based on a data set that is mainly intended for other purposes. Today I want to call attention to an important paper that reaches similar conclusions on the basis of far better data.

The paper is “Earnings Shocks and Stabilization During COVID-19” by Jeff Larrimore, Jacob Mortenson and David Splinter.1 If you’re following these debates, it’s a must-read.

The question they ask is slightly different from the one I did. Rather than look at the average change in income at each point in the distribution, they ask what fraction of workers experienced large declines in their incomes. Specifically they ask, for each point at the distribution of earnings in a given year, what fraction of workers had earnings at least 10 percent lower a year later? They include people whose earnings were zero in the second year (which means the results are not distorted by compositional effects), and do the exercise both with and without unemployment insurance and — for the most recent period — stimulus payments. They use individual tax records from the IRS, which means their sample is much larger and their data much more accurate than the usual survey-based sources.

What they find, first of all, is that earnings are quite volatile — more than 25 percent of workers experience a fall in earnings of 10 percent or more in a typical year, with a similar share experiencing a 10 percent or more increase. Looking at earnings alone, the fraction of workers experiencing large falls in income rose to about 30 percent in both 2009 and 2020; the fraction experiencing large increases fell somewhat in 2009, but not in 2019. See their Figure 1 below.

Turning to distribution, if we look at earnings alone, large falls were more concentrated at the bottom in 2020 than in 2009. This is shown in their Figure 2.  (Note that while the percentiles are based on earnings plus UI benefits, the  vertical axis shows the share with large falls in earnings alone.)  This pattern is consistent with the concentration of pandemic-related job losses in low-wage sectors. 

But when you add unemployment insurance in, the picture reverses. Now, across almost the whole lower half of the distribution, large falls in earnings were actually less common in 2020 than in 2019. And when you add in stimulus payments, it’s even more dramatic. Households in the bottom 20 percent of the distribution were barely half as likely to experience a larger fall in income in the crisis year of 2020 as in they were in the normal year of 2019.

The key results are summarized in their Table 1, below. It’s true that the proportion of low-wage households that experienced large falls in earnings during 2020 was greater than the proportion of high-wage households. But that’s true in every year — low incomes are just much more volatile than high ones. What’s different is how much the gap closed. Even counting the stimulus payments, households in the top fifth of earnings were somewhat more likely to experience a large fall in earnings in 2020 than in 2019. But in the bottom fifth, the share experiencing large falls in income fell from 43 percent to 27 percent. Nothing like this happened in 2009 — then, the frequency of large falls in income rose by the same amount (about 6 points) across the distribution. 

One thing this exercise confirms is that the more favorable experience low-income households in the pandemic downturn was entirely due to much stronger income-support programs. Earnings themselves fell even more disproportionately at the bottom than in the last recession. In the absence of the CARES Act, income inequality would have widened sharply rather than narrowed.

The one significant limitation of this study is that tax data is only released well after the end of the year it covers. So at this point, it can only tell us what happened in 2020, not in 2021. It’s hard to guess if this pattern will continue in 2021. (It might make a difference whether the child tax credit payments are counted.) But whether or not it does, doesn’t affect the results for 2020.

While the US experienced the most rapid fall in economic activity in history, low-wage workers experienced much less instability in their incomes than in a “good” year. This seems like a very important fact to me, one that should be getting much more attention than it is.

It didn’t have to turnout that way. In most economic crises, it very much doesn’t. People who are saying that the economy is over stimulated are implicitly saying that protecting low-wage workers from the crisis was a mistake. When the restaurant workers should have been left to fend for themselves. That way, they wouldn’t have any savings now  and wouldn’t be buying so much stuff. When production is severely curtailed, it’s impossible to maintain people’s incomes without creating excess demand somewhere else. But that’s a topic for another post. 

The point I want to make — and this is me speaking here, not the authors of the paper — is that the protection that working people enjoyed from big falls in income in 2020 should be the new benchmark for social insurance. Because the other thing that comes out clearly from these numbers is the utter inadequacy of the pre-pandemic safety net.  In 2019, only 9 percent of workers with large falls in earnings received UI benefits, and among those who did, the typical benefit was less than a third of their previous earnings. You can see the result of this in the table — for 2009 and 2019, the fraction of each group experiencing large  falls in earnings hardly changes when UI is included. Before 2020, there was essentially no insurance against large falls in earnings.

To be sure, the tax data doesn’t tell us how many of those with big falls in earnings lost their jobs and how many voluntarily quit. But the fact that someone leaves their job voluntarily doesn’t mean they shouldn’t be protected from the loss of income. Social Security is,  in a sense, a form of (much more robust) unemployment insurance for a major category of voluntary quits. The paid family and medical leave that, it seems, will not be in this year’s reconciliation bill but that Democrats still hope to pass, is another.

Back in the spring, people like Jason Furman were arguing that if we had a strong recovery in the labor market then we would no longer need the $400/week pandemic unemployment assistance. But this implicitly assumes that we didn’t need something like PUA already in 2019.

I’d like to hear Jason, or anyone, make a positive argument that before the pandemic, US workers enjoyed the right level of protection against job loss. In a good year in the US economy, 40 percent of low-wage workers experience a fall in earnings of 10 percent or more. Is that the right number? Is that getting us the socially optimal number of evictions and kids going to bed hungry? Is that what policy should be trying to get us back to? I’d like to hear why. 

A C-Shaped Recovery?

The coronavirus crisis has been different from normal recessions in many ways, but one of the most important is the scale of the macroeconomic response to it. 

Thanks to the stimulus payments, the pandemic unemployment insurance, the child tax credit, and a raft of other income support measures, this is the first recession in history in which household income actually rose rather than fell, and households ended up in a stronger financial position than before — with bankruptcies, for instance, running at half their pre-pandemic rates. It’s this that’s allowed spending to come back so quickly as the pandemic recedes. It wasn’t written in stone that the economic problem at the end of 2021 would be labor “shortages” and inflation, rather than double-digit unemployment and mass immiseration. The rising wave of hunger, homelessness and bankruptcies that people feared at the start of the pandemic hasn’t shown up. But that doesn’t mean that it couldn’t have. Without the stimulus measures of the past year and a half, it most likely would have. 

This extraordinary success story is the missing context for today’s macroeconomic debates. It’s somehow becoming conventional wisdom that the economy is “overstimulated,” as if the economic disruptions of the pandemic could have been managed some other way. As Claudia Sahm observed last week, the choice facing policymakerswas either to repeat the mistakes of the Great Recession or to go big. Fortunately, they went big.

The aggregate dimension of this story is familiar, even it’s sometimes forgotten these days. But I’ve seen much less discussion of the distributional side. Disposable income has held up overall, but what about for people at different income ranges?

For detailed statistics on this, we will have to wait for the American Community Survey produced by the Census. The ACS comes out annually; the first data from 2020 will be released in a month or so, and 2021 numbers will take another year. For real-time data we depend on the Current Population Survey, from the Bureau of Labor Statistics. This is the source for all the headline numbers on unemployment, wages and so on. 

The CPS is mainly focused on labor-market outcomes, but it does have one question about income: “What was the total combined income of all members of your family over the past 12 months?”2 The answer is given as one of 15 ranges, topping out at $150,000 or higher.

Compared with what we get from the ACS (or other more specialized surveys like the Survey of Consumer Finances or the Survey of Income and Program Participation) that’s not very much information. But it’s enough to get the big picture, and it has the major advantage of being available in close to real time. 

I have not seen anyone use the CPS to look at how real (inflation-adjusted) income changed across the distribution during the pandemic, compared with in the previous recession. So I decided to look at it myself. The results are shown in the figure nearby.

What I’ve done here is construct a household income measure by distributing households evenly within their buckets. Then I adjusted that income for inflation using the CPI. Then I compared family income at each point in the distribution in September 2021 — the most recent available — with September 2019, and then did the same thing for September 2009 and September 2007. I used the CPI for the inflation adjustment because the PCE index isn’t available yet for September.3 Using two-year periods ending in September seemed like the best way to make an apples-to-apples comparison and avoid seasonal effects.4 The idea is to see what happened to income across the distribution during the pandemic as compared to a similar time period during the Great Recession.

What you see here, for instance, is that a household at the 10th percentile — that is, whose income was higher than 10 percent of households and lower than 90 percent — had an income 4 percent higher in September 2021 than in September 2019. Over the 2007-2009 period, by contrast, real income at the 10th percentile fell by 8 percent. Real income the 80th percentile, on the other hand, fell by about 3 percent in both periods.5

As the figure makes clear, the difference between this recession and the previous one is not not just that disposable income fell last time but has been stable this time. The two crises saw very different patterns across income levels. The overall stability of personal income over the past two years is the result of substantial gains at the bottom combined with modest falls in the upper two-thirds. Whereas the fall in aggregate income during the Great Recession — as in most recessions — combines a much larger fall at the bottom with relative stability at the top. 

This seems to me like a very important and very under-appreciated fact about the past two years. This is not just the first recession in which household income didn’t fall. It’s the first recession — in modern times, if not ever — that hit higher income families harder than low-income ones. So far, it looks less like a K-shaped recovery than a C-shaped one.

Let’s look at it another way. Between December 2007 and December 2009 — the period of the Great Recession — the share of households who reported a total income under $30,000 rose from 26.3 percent to 28.6 percent. Incomes rose over the next decade, so that by December 2019, a similar roughly one-quarter share of households reported total income of under $35,000. But over the next two years, this share fell by almost two points, from 25.7 to 23.9 percent. The fraction reporting incomes under $30,000 fell from 20.5 to 18.8 percent, while the fraction reporting incomes under $20,000 fell from 16.3 percent to 14.6 percent. This suggests a substantial decline in the number of families facing serious material hardship. 

You might say: But real income did fall across most of the distribution. That is true.6 But think about it: We have just lived through a pandemic that, among other things, caused the most rapid fall in economic activity in US history. 20 million jobs disappeared overnight, and millions of them still have not come back. Of course income fell! What’s surprising is that it didn’t fall by more — that the short-term disruption was followed by a rapid bounce back rather than the long jobless recovery we’ve had after previous crises. What’s also a departure from previous downturns is whose incomes fell and whose didn’t.

Because the CPS income data is top-coded at $150,000 — about 15% of US households are above this — and the bucket below that is quite wide, the CPS isn’t informative about income at the top end. That’s why the figures cut off at the 80th percentile. I don’t see any obvious reason why high-income families should have had very different experiences in the two recessions, but we will have to wait for other data to be released to find out for sure.

There are certainly problems with measuring income with a single question. It’s not always clear what households are counting as income, especially at the low end where transfers make up a higher portion of the total. But it’s the same question in all four years. I find it hard to believe that the contrasting shifts in the numbers don’t reflect a genuine difference in the experience of low-income families over the two periods.

After all, this is consistent with what we know from other sources. Wage gains have been stronger at the bottom than at the top, by a growing margin. In the Household Pulse survey that the Census has been conducting regularly since the start of the pandemic, the dog that didn’t bark is the lack of any increase in most measures of material deprivation. In the most recent survey, for example, 9 percent of families reported that in the past week, they sometimes or often didn’t have enough to eat. That’s a shockingly high number — but it is a somewhat lower number than in April 2020. And of course, what’s all the talk about labor shortages but complaints — sometimes in so many words — that people no longer feel they have to accept underpaid drudge work out of sheer desperation?

Maintaining or improving access to necessities for the most vulnerable through an economic catastrophe is a major accomplishment. Yet what’s striking about the current moment is how little anyone is taking credit for it. 

Of course there are reasons why the focus is where it is. It’s easier to talk about the problems we are actually facing than the much worse crisis we didn’t have. (There ought to be a name for the fallacy where a timely response to head off some danger is retroactively treated as a sign there was no danger in the first place.) Conservatives obviously don’t want to acknowledge the success of a massive public spending program, especially when Democrats are in office (and don’t necessarily approve of making poor people less poor in the first place.) Progressives are more comfortable criticizing bailouts than celebrating economic success stories. (And of course there is plenty to criticize.) And with the Build Back Better agenda on the line, one might worry that talking about how the measures of the past year and a half have raised up the bottom will feed a dangerous complacency, a sense that we’ve done enough already.

As it happens, I’m not sure that last worry is justified. Back when I did political work, one of things that came though most clearly talking to organizers, and to people at doors myself, is that for most people the biggest obstacle to political engagement isn’t satisfaction with the way things are, but doubt that collective action can change them. Most people,I think, are quite aware that, as we used to say, “Shit is fucked up and bullshit.” What they lack is a sense of the connection of politics and policy with the concrete problems they face. Even among political professionals, I suspect, doubt that things can be very different is often a more powerful conservative force than a positive attachment to things as they are. Remembering how policymakers made the choice go big during the pandemic might, then, strengthen, rather than undermine, the case for going big today.

Be that as it may, if it is in fact the case that during a period when unemployment spiked to 15 percent, incomes at the bottom end actually rose, that seems like an important fact about the world that someone ought to be talking about.

 

UPDATE:

Some people have asked whether the apparent rise in incomes at the bottom might be due to changes in family size — maybe more people moved in together and pooled their income during the pandemic? To address that, here’s another version of the figure, this one showing the change in real income divided by household size.

As it turns out, average household size actually shrank slightly over 2019-2021. This was not the case in 2007-2009, so adjusting for household size makes the recent performance look a bit better relative to the previous one. But as you can see, the broad picture is essentially the same.