The CBO is reporting that macroeconomic volatility has declined, but at the same time earnings volatility has remained fairly high and that this volatility to income and earnings has possibly increased. The report’s main findings are,
- First, macroeconomic volatility—the ups and downs of overall economic growth and inflation—has declined and is now relatively low. In particular, year-to-year fluctuations in the economy have become smaller than in the past.
- Second, despite the relatively modest volatility in the overall economy, workers and households still experience substantial variability in their earnings and income from year to year. CBO’s analysis shows, for example, that between 2001 and 2002, one in four workers saw his or her earnings increase by at least 25 percent, while one in five saw his or her earnings decline by at least 25 percent. Some of that variability stems from voluntary actions, such as a decision to stay home and rear children, and some stems from involuntary events, such as the loss of a job. Earnings volatility is somewhat higher for people with less education.
- Third, although earnings and income volatility is substantial, more research is required to determine how and when that variability has changed over the past few decades. The evidence that exists suggests that earnings have tended to fluctuate more, on a percentage basis, over the past 25 years than they did during the 1970s. The number of studies on the topic is limited, however, so it is too early to reach firm conclusions about the precise timing or magnitude of any increase. Given their importance, trends in income volatility seem to warrant significant research attention.
- Finally, while the unemployment rate has been relatively low in recent years, the adverse consequences of losing one’s job appear to have increased. In particular, a higher fraction of unemployed workers remain unemployed for very long periods, and the average reduction in earnings once they are reemployed appears to have grown.
I’ve known that economic growth has become less volatile and the CBO report gives the variance for both growth and inflation. The variance for economic growth from 1950 to 1984 is 3.1 whereas from 1985 to 2005 it is 1.4, less than half. There is an even larger decrease for inflation with the 1950 to 1984 variance at 2.9 and for 1985 to 2005 at 1.0.
And the report’s findings on household earnings and income supports John Quiggin’s story/theory of why we have seen an increase in the number of bankruptcies.
Also, my suspicion that there has been a change in how unemployment works with recessions also seems true.
While the peaks for long term unemployment during the last two recessions are lower than the global peak in the early 1980’s people appear to remain unemployed for a longer period of time.
So overall the economy has become less volatile, yet earnings and income have remained subject to some fairly large volatility and this volatility may have even increased.
