Category: Labor Economics

 

    Source of graphs:  online version of the WSJ article cited below.

 

WASHINGTON — Weighing in on an intensifying debate on income insecurity, three economists — including two from the Federal Reserve — have found that American families today are more likely to experience big drops in their income than three decades ago.

Their analysis, however, finds far less volatility in family income than some recent studies.

The authors of the new study, Douglas Elmendorf of the Brookings Institution and senior Fed economists Karen Dynan and Daniel Sichel, caution against interpreting their findings as evidence that families face more risk of hardship than before. They note that financial innovation has given Americans more ways to maintain their spending when their incomes fall. (Read the full study.)

The study found that the volatility of household income rose 23% between the early 1970s and early 2000s. While small changes in family income are no more frequent, large changes in income — more than 50% — are.

The probability that a family will experience a decline in annual income of 50% or more, compared with their average income in the previous three years, rose to 1.8% in 1995 from 0.6% in 1973. After 1995, the probability dipped, and has risen back to 1.7%.

"The increase in volatility we document is not trivial," Mr. Elmendorf said in an interview. "Our work is quite consistent with being concerned about the level and increase in volatility of household income."

That said, "I don’t think our results support the view that the world is dramatically more adverse for households," he added.

. . .

Yet research into the assumption that income volatility has increased has reached differing conclusions. Yale University political scientist and author Jacob Hacker, in a 2006 book titled "The Great Risk Shift," documents a fivefold increase in household-income volatility between the early 1970s and early 1990s. Mr. Hacker, who described himself as "thunderstruck" by the result, has written widely and testified to Congress on the subject. He couldn’t be reached for comment.

By contrast, the Congressional Budget Office, using a different set of data, found that earnings volatility for individuals — as opposed to households — has changed little since the early 1980s.

But the authors argue that bigger swings in income need not force households to slash their spending. They cite preliminary findings from other research they have conducted that show financial innovation, such as easier borrowing against the value of a home, has helped to insulate family spending patterns from fluctuations in income.

 

For the full story, see: 

GREG IP.  "Incomes Suffer More Volatility Amid Heightening Risks, Families Find Ways to Cushion Blows."  The Wall Street Journal   (Fri., June 22, 2007):  A4.

(Note:  ellipsis added.)

 

 

Stephen J. Rose, the author of the commentary quoted below, was previously an advisor to Democratic President Clinton’s former Secretary of Labor, Robert Reich.  He is currently a senior economic fellow with the Progressive Policy Institute.  The commentary is based on Rose’s report "The Truth About Middle Class Jobs."

 

Economic change is a messy process. New technologies open up many opportunities for those prepared to take advantage of them. At the same time, old firms and their workers are displaced and forced to start over. In 1900, for example, 40% of the U.S. work force was involved in agriculture. Today, that figure is less than 2%, and no serious observer would argue that we are worse off as a result of this transformation.

Yet many of today’s most prominent politicians and pundits are making an updated version of precisely this argument. They claim that the decline in the number of manufacturing jobs has led to the replacement of good middle-class jobs by low-skill, low-pay "hamburger-flipping" service jobs.

. . .

 Let us look at the distribution of earnings in 1979, compared with the distribution of earnings of the net new jobs created since that year.  . . .

. . .

Here’s the bottom line: For three-quarters of the workforce (women and the top half of male earners), economic growth translated into earnings gains. But for male workers in the bottom half of the earnings distribution, the decline of unionized manufacturing employment has led to the drying up of some middle-class jobs for those with no post-secondary education.

For the clear majority of the workforce, then, the job market has become more welcoming, not less so. But where are these jobs?

Using a framework that I developed in the 1990s, I find that most of the employment gains over the last 30 years have been in business-management activities (administration, sales, finance and business services) as well as in professional services such as health care and education. While the percentage of U.S. jobs derived from manual work in agriculture, mining, timber and manufacturing has declined, the share of jobs related to low-skilled retail and personal/food services has remained steady.

 

For the full commentary, see: 

STEPHEN J. ROSE.  "The Myth of Middle-Class Job Loss."  The Wall Street Journal  (Weds., October 24, 2007):  A21.

(Note:  ellipses added.)

 

 

Perhaps the commentary excerpted below goes a bit too far.  I do not believe that paid work is necessary for happiness.  But I do think that a life mainly of leisure can wear thin.  A few months ago I heard Deirdre McCloskey say that we need "projects" to keep us moving forward.  I think that is right, and the best work involves challenging, meaningful projects.

 

By almost every measure, Europeans do work less and relax more than Americans. According to data from the Organization for Economic Co-operation and Development, Americans work 25% more hours each year than the Norwegians or the Dutch. The average retirement age for European men is 60.5, and it’s even lower for European women. Our vacations are pathetically short by comparison: The average U.S. worker takes 16 days of vacation each year, less than half that typically taken by the Germans (35 days), the French (37 days) or the Italians (42 days).

. . .

For most Americans, work is a rock-solid source of life happiness. Happy people work more hours each week than unhappy people, and work more in their free time as well. Even more tellingly, people with more hours per day to relax outside their jobs are not any happier than those who have less non-work time. In short, the idea that our heavy workloads are lowering our happiness is twaddle.

. . .

This may be one reason why Americans tend to score better than Europeans on most happiness surveys. For example, according to the 2002 International Social Survey Programme across 35 countries, 56% of Americans are "completely happy" or "very happy" with their lives, versus 44% of Danes (often cited in surveys as the happiest Europeans), 35% of the French and 31% of Germans. Those sweet five-week vacations and 35-hour workweeks don’t seem to be stimulating all that much félicité. A good old-fashioned 50-hour week might be a better option.

 

For the full commentary, see: 

ARTHUR C. BROOKS.  "Happy for the Work."  The Wall Street Journal  (Weds., June 20, 2007):  A16. 

(Note:  ellipses added.)

 

 

Many of us would say that income inequality is not bad, if it reflects differences in worker productivity.  One argument in the article excerpted below, is that information technology has allowed better measurement of worker productivity, and hence is partly responsible for the increase in income inequality.

 

. . . as companies and compensation consultants began using information technology to determine more accurately the contributions of individual employees, employers began to discriminate among employees based on performance. In a working paper, Professor MacLeod, along with Thomas Lemieux of the University of British Columbia and Daniel Parent of McGill University, mined census data and found that the proportion of jobs with a performance-pay component rose to 40 percent in the 1990s from 30 percent in the late 1970s.

”Since companies are better able to measure precisely what an employee contributes, we’ve seen a greater range of incomes among people doing roughly the same jobs,” Professor MacLeod said.

The fact that more Americans are paid less on the basis of a job title and more on their individual output inexorably leads to greater inequality. The authors’ conclusion is that the rise of performance-based pay has accounted for 25 percent of the growth in wage inequality among male workers from 1976 to 1993.

”All the bits of evidence we have tend to say that this trend is continuing,” Professor Lemieux said. In 2003, the authors note, 44.5 percent of workers at Fortune 1000 companies received some form of performance-based pay, up from 34.7 percent in 1996. And think of the growing legions of self-employed — people selling items on eBay, mortgage brokers and real estate brokers, freelance journalists and consultants of all types — for whom all pay is performance-based. Among these growing cadres, the dispersion of incomes is rather large.

”When you look at the self-employed and contractors,” Professor Lemieux said, ”inequality is much higher.”

 

For the full commentary, see: 

DANIEL GROSS.  "ECONOMIC VIEW; Income Inequality, Writ Larger."  The New York Times, Section 3  (Sun., June 10, 2007):  7.

(Note:  ellipsis added.)