Who Loses in the Downturn? Economic Crisis, Employment and Income Distribution: Volume 32

Macroeconomic shocks such as the recent global economic crisis can have far-reaching effects on the levels and the distribution of resources at the individual and the household levels. A recession associated with a labor market downturn and turbulent property and financial markets gives rise to significant and widespread losses for workers and households. Identifying the likely pattern of losses is, however, not straightforward. This is especially the case at the outset of a severe recession, when up-to-date information about current household circumstances is patchy, and economic conditions are subject to rapid change.

The impact of the “Great Recession” on inequality is unclear. Because the crises in the housing and stock markets and mass job loss affect incomes across the entire distribution, the overall impact on inequality is difficult to determine. Early speculation using a variety of narrow measures of earnings, income, and consumption yield contradictory results. In this chapter, we develop new estimates of income inequality based on “more complete income” (MCI), which augments standard income measures with those that are accrued from the ownership of wealth. We use the 1989–2007 Surveys of Consumer Finances, and also construct MCI measures for 2009 based on projections of assets, income, and earnings.

We investigate the level and trend in MCI inequality and compare it to other estimates of overall and “high incomes” in the literature. Compared to standard measures of income, MCI suggests higher levels of inequality and slightly larger increases in inequality over time. Several MCI-based inequality measures peaked in 2007 at their highest levels in 20 years. The combined impact of the Great Recession on the housing, stock, and labor markets after 2007 has reduced some measures of income inequality at the top of the MCI distribution. Despite declining from the 2007 peak, however, inequality remains as high as levels experienced earlier in the decade, and much higher than most points over the last 20 years. In the middle of the income distribution, the declines in income from wealth after 2007 were the result of diminished value of residential real estate; at the top of the distribution, declines in the value of business assets had the greatest impact.

We also assess the level and trend in the functional distribution of income between capital and labor, and find a rising share of income accruing to real capital or wealth from 1989 to 2007. The recent economic crisis has diminished the capital share back to levels from 2004. Contrary to the findings of other researchers, we find that the labor share of income among high-income groups declined between 1992 and 2007.

We examine the relationship between the business cycle and poverty for the period from 1960 to 2008 using income data from the Current Population Survey and consumption data from the Consumer Expenditure Survey. This new evidence on the relationship between macroeconomic conditions and poverty is of particular interest, given recent changes in antipoverty policies that have placed greater emphasis on participation in the labor market and in-kind transfers. We look beyond official poverty, examining alternative income poverty and consumption poverty, which have conceptual and empirical advantages as measures of the well-being of the poor. We find that both income and consumption poverty are sensitive to macroeconomic conditions. A 1 percentage point increase in unemployment is associated with an increase in the after-tax income poverty rate of 0.9–1.1 percentage points in the long run, and an increase in the consumption poverty rate of 0.3–1.2 percentage points in the long run. The evidence on whether income is more responsive to the business cycle than consumption is mixed. Income poverty does appear to be more responsive using national level variation, but consumption poverty is often more responsive to unemployment when using regional variation. Low percentiles of both income and consumption are sensitive to macroeconomic conditions, and in most cases, low percentiles of income appear to be more responsive than low percentiles of consumption.

There has been much commentary on the consequences of a recession on the incomes of households. This short chapter aims to contribute to the debate about the current recession by analysing the impact of the recessions of the early 1980s and 1990s on non-employment patterns among people in the main range of working ages in Great Britain. The hypothesis is that the effects observed in earlier business cycles are likely to be repeated now. The chapter uses a series of General Household Surveys over a 32-year period, to show, first, the impact of cyclical factors on overall patterns of non-employment (including mothers and disabled people, as well as the unemployed), and second, which social groups are most affected. A key question is whether types of people who are already disadvantaged are especially sensitive to a downturn. Recent data can be used to test how far the experience of previous business cycles is being repeated in the current recession.

The recession the US economy entered in December of 2007 is considered to be the most severe downturn the country has experienced since the Great Depression. The unemployment rate reached as high as 10.1% in October 2009 – the highest we have seen since the 1982 recession. In this chapter, we examine the severity of this recession compared to those in the past by examining worker flows into and out of unemployment taking into account changes in the demographic structure of the population. We identify the most vulnerable groups of this recession by dissagregating the workforce by age, gender, and race. We find that adjusting for the aging of the US labor force increases the severity of this recession. Our results indicate that the increase in the unemployment rate is driven to a larger extent by the lack of hiring (low outflows), but flows into unemployment are still important for understanding unemployment rate dynamics (they are not as acyclical as some literature suggests) and differences in unemployment rates across demographic groups. We find that this is indeed a “mancession,” as men face higher job separation probabilities, lower job finding probabilities, and, as a result, higher unemployment rates than women. Lastly, there is some evidence that blacks suffered more than whites (again, this difference is particularly pronounced for men).

This chapter provides an assessment of the effects of the Great Recession on the Italian labour market. Two-thirds of the decrease in employment taking place during the 2008:4 to 2009:4 period were due to the fall in job-finding probabilities, while transitions out of employment significantly increased only for employees with flexible contracts. According to micro-level multiple stochastic imputations coherent with the evolution of the employment rate, income losses related to job terminations will be partially offset by the highly fragmented income support safety nets available. A stress test shows that income stabilization offered is pro-cyclical, while labour income inequality is driven by changes in employment: inequality among the employed seems to be rather insensitive to the composition of employment.

In Germany, the economic crisis 2008/09 was restricted to export-oriented industries such as automotive, chemistry, and mechanical engineering and hence to industries with a high proportion of qualified employees. Therefore, we expect the most current crisis to have a reversed effect on the relative earnings position between more and less qualified in contrast to a development that favored the more qualified since the beginning of the 1980s. Our empirical study is based on the Institute for Employment Research (IAB) Establishment Panel, a representative German establishment level panel data set that surveys information from almost 16,000 personal interviews with high ranked managers.

Despite the “German Job Miracle,” conditional difference-in-differences estimations to control for observed and unobserved heterogeneity reveal substantial employment reductions in establishments affected by the economic crisis. Falls in employment are strongest in plants with a relatively low proportion of qualified workers. Furthermore, our results indicate that the economic crisis is associated with a decline in wages, but only in those establishments that do not operate working time accounts. In sum, we do not find evidence for the current crisis having a reversed effect on the relative earnings position. Obviously once again, the higher qualified are better off than the lower qualified.

An important aspect of the impact of the economic crisis is how pay in the public sector responds – in the face not only of the evolution of pay in the private sector but also extreme pressure on public spending (of which pay is a very large proportion) as fiscal deficits soar. What are the effects on the income distribution of cutting public sector pay rates or alternative strategies to reduce the public sector pay bill? This chapter investigates these issues using data and a tax–benefit simulation model for Ireland, a country which faces a particularly severe fiscal crisis and where innovative measures have already been implemented to claw back pay from public sector workers in the guise of a ‘pension levy’, followed by a significant cut in nominal pay rates. The SWITCH (Simulating Welfare and Income Tax Changes) tax–benefit model first allows the distributional effects of these measures, which achieved a substantial reduction in the net public sector pay bill, to be teased out. The overall impact on the income distribution is assessed. This provides empirical evidence relevant to policy choices in relation to a key aspect of household income over which governments have direct influence, while at the same time illustrating methodologically how a tax–benefit model can serve as the base for such investigation.

This chapter investigates to what extent the tax and transfer systems in Europe protect households at different income levels against losses in current income caused by economic downturns like the present financial crisis. We use a multi-country microsimulation model to analyse how shocks on market income and employment are mitigated by taxes and transfers. We find that the aggregate redistributive effect of the tax and transfer systems increases in response to the shocks. But the extent to which households are protected differs across income levels and countries. In particular, there is little stabilization of disposable income for low-income groups in Eastern and Southern European countries.

As unemployment rises across the European Union (EU), it is important to understand the extent to which the incomes of the new unemployed are protected by tax–benefit systems and to assess the cost pressures on the social protection systems of this increase in unemployment. This chapter uses the EU tax–benefit model EUROMOD to explore these issues, comparing effects in five EU countries. It provides evidence on the differing degrees of resilience of the household incomes of the newly unemployed due to the variations in the protection offered by the tax–benefit systems, according to whether unemployment benefit is payable, the household situation of the unemployed person and across countries.