This Recession’s Innocents

May 9, 2011

For release May 4 and thereafter (511 words)

It will take years for scholars to fully understand the extent and severity of the 2007-2009 recession. For certain, though, children being raised by parents unable to find work earning income sufficient for a family’s needs will carry long-term psychological effects.

Until now, such household catastrophes were believed preventable when two adult parents were willing and able to self-insure against job and income loss. Regarding this concern, the Wall Street Journal recently published a report of a troubling decline in wage-based income between 1970 and 2010:

• In 1970, wages, salaries and employee benefits accounted for about three-quarters of total U.S. personal income. Dividends, interest and rental income contributed about 14 percent. Government benefits (disability, unemployment, welfare) were less than eight percent.

• By 2005, however, the share of wage income dropped to 67 percent and by 2010 to 64 percent. Government benefits now account for a relatively large 18 percent of total household income. These figures underscore why consumer spending is now more vulnerable to changes in higher income households, less dependent on wage income.

The 2007-2009 downturn was remarkable in many aspects and differed significantly from the tech bubble burst in 2001. A report in the Journal of Economic Perspectives indicates that U.S. households in 2008 suffered the worse one-year decline in net worth relative to income in a century of record keeping.

In 2001, a rising tide of real-estate values compensated somewhat for the stock-market crunch. In the recent recession, in contrast, both stocks and real estate fell by about 30 percent. Furthermore, the financial and banking sectors amplified the negative economic shocks emanating from the housing bubble.

Meanwhile, wage income accounts for less and less total spending.

Bill Burbage, writing to the Wall Street Journal, notes the combined payroll taxes for Social Security and Medicare alone are 15.3 percent. This payment is a deal-breaker leading to employer-employee dropouts and underground economic activity. People need jobs, and in such times it should be less expensive rather than more expensive for employers to hire workers.

A persuasive article in the fall issue of Economic Perspectives suggests that virtually the entire 2007-2009 U.S. recession can be accounted for by changes in labor markets. If this indeed is the case, it raises a serious question: How did the American Recovery and Reinvestment Act, the “Cash for Clunkers” program, the Treasury mortgage modification programs, the health insurance regulations and other new policies address the issue of a family’s inability to thrive due to low returns from wage income?

Each of these measures in fact distorts labor-market incentives. Each of these measures increases employment uncertainty. The demand for labor declines due to perceived increased in the cost of hiring. In addition, the labor supply, to a smaller extent, declines as eligibility for transfers implicitly raises income-tax rates on some households. Thus, employment contracted in the 2007-2009 recession by 6.7 percent compared with 3.8 percent for average postwar U.S. recessions.

The behavior of low-wealth households dependent on traditional wage income did not cause the recession. These are the households, however, that have experienced great distress from the high rates of unemployment.

For these families, children included, the 2007-2009 recession is not over.

Maryann O. Keating, Ph.D., a South Bend resident and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of Microeconomics for Public Managers, Wiley/Blackwell, 2009.
 


Resources

Kelly Evans. “Gains in Income Aren’t Lifting All Boats.” The Wall Street Journal, March 28, 2011, C1.

Vincent Reinhart. “A Year of Living Dangerously: The Management of the Financial Crisis in 2008,” The Journal of Economic Perspectives, Winter, 2011, 71-90.

Bill Burbage. Letter to the editor. The Wall Street Journal, March 29, 2011 A18.



Comments...

Leave a Reply

Your email address will not be published. Required fields are marked *