Family income volatility is not itself a measure of economic hardship, just
as the volatility of a stock is not itself a measure of economic return.
Greater volatility could reflect increased social mobility, or it could
represent a largely benign side-effect of rapid increases in family incomes.
Unfortunately, neither of these sunny interpretations of rising income
volatility is warranted. The extent of social mobility in American society
remains a subject of heated dispute, but analysts generally agree that social
mobility—whether intergenerational, or over the course of the working life—is
no higher today than it was a generation ago, and perhaps lower. Nor does it
appear markedly higher in the United States than it does in other advanced
industrial nations. Princeton economist Alan Krueger has recently gone so far
as to declare: “If the United States stands out in comparison with other
countries, it is in having a more static distribution of income across
generations with fewer opportunities for advancement.”
On the other hand, family incomes have certainly increased in the United States since the late 1970s—particularly at the top of the economic ladder. Yet in the middle of the economic ladder, the average rise has been surprisingly modest: median family incomes increased by around 15 percent between 1979 and 2000. Furthermore, about three-quarters of the rise in median family incomes, according to Jared Bernstein and Karen Kornbluh, can be accounted for by the increasing work hours of women. Median families are richer, albeit modestly so. But they are richer not principally because employees are earning more, but because they are working more hours than they used to.
Rising economic volatility, in short, is not the result of massively improved social mobility or runaway prosperity for the middle class. Instead, it appears to result from the complex interaction of two profound changes in the economic environment of middle-class families: rising job instability and the transformation of the American family.
Job and Family Risks
One probable reason for greater volatility of incomes is that the nature of
unemployment has changed. The conventional view of unemployment sees it as
cyclical: workers are laid off or lose jobs when the economy sours, but are
able to return to work at a similar job in the same industry, and sometimes
even with the same employer, when the economy improves. Today, however, job
loss is increasingly likely to be persistent. Workers are less often able to
return to a similar job in a similar industry, and so unemployment frequently
ends only when workers accept a new job that requires major cuts in pay, hours,
This trend shows up in a number of places. Although the unemployment rate has remained historically low in recent years, the rate of involuntary job loss (defined as “worker terminations as a result of business decisions unrelated to the performance of the particular employee” (Farber 2005, 13) has actually been rising. In the 2001 recession, the rate of involuntary job loss exceeded the levels reached during the deep downturn of the early 1980s.
The last two recessions of 1990-91 and 2001 have also featured historically high levels of unemployment that exceeds six months. Traditionally, long-term unemployment has peaked six to eight months after a recession ends. In the recession of the early 1990s, however, long-term unemployment peaked 19 months into the recovery. After the 2001 recession, long-term unemployment peaked 29 months in (Schreft and Singh 2003). More than a third of workers involuntarily displaced between 2001 and 2004 (notably, a period of economic recovery) failed to find employment, and 13 percent found only part-time work. And even full-time workers who found full-time jobs—the best-case scenario, if you will—ended up earning around 17 percent less than they would have had they not been displaced (Farber 2005).
A major reason for the divorce between the unemployment and job-loss figures is that many of those displaced from the labor market are not “actively seeking work” and, hence, not formally unemployed. Yet there is good evidence that many of these potential workers would be in the labor force were the opportunities for them greater. In 2005, according to Katharine Bradbury of the Federal Reserve Bank of Boston, the total labor force “shortfall”—compared with similar points in the business cycle in the past—was as high as 5.1 million men and women. This amount would raise the official unemployment rate to 8.7 percent, a level not seen since the steep recession of the early 1980s.
The second major shift that appears responsible for increasing family economic volatility is the transformation of the family—most notably, the dramatic movement of women into the workforce (Warren and Tyagi 2003). This may come as a surprise. Popular commentary portrays two-earner families as islands of stability amid a sea of social uncertainty. Similarly, much of what economists write about the family assumes that the two-earner family serves as a form of private risk-sharing, allowing families to better deal with shocks to income. The analogy is a stock portfolio. Rather than holding a single stock (the husband’s earnings), the two-earner family holds two (the husband’s and wife’s earnings). To paraphrase the old adage of investment, two-earner couples don’t put all their eggs in one basket.
But while two-earner families enjoy special advantages when it comes to private risk-sharing, they can scarcely eliminate economic risk—and in some important ways, two-earner families face special risks of their own. Recall, first of all, that Figure 1 shows that family incomes have grown more variable even as women have entered the workforce in record numbers. Clearly, private risk-sharing has not been sufficient to counter the dramatic increase in family income volatility over the past thirty years.
This is partly because the world has not stood still as women have entered the workforce. In the idealized view of two-earner families, couples “diversify” risk by deciding to jointly enter the workforce and then purchase private substitutes for the previously unpaid labor provided by stay-at-home moms. In reality, the choices of two-earner families have not been as unconstrained as this idealized picture suggests. To most families today, as Elizabeth Warren’s essay drives home, a second income is not a luxury, but a necessity in an era in which wages have been relatively flat and the cost of basic expenses has been rapidly rising. In time-use surveys, both men and women who work long hours indicate they would like to work fewer hours and spend more time with their families—which strongly suggests they are not able to choose the exact mix of work and family they would prefer.
Moreover, although two-earner families are less likely to experience a catastrophic income drop, they are more likely to experience smaller fluctuations in income. After all, if every worker has an equal chance of experiencing a drop in their income, a family with two workers has a substantially greater chance of experiencing an income shock. To be sure, the drop in family income is smaller than it would be if the worker experiencing it were the sole breadwinner. But it is still a more likely occurrence. You may never lose all the eggs when they are in more than one basket, but the likelihood of losing at least some of them is greater.
And all this is to treat these married partners simply as workers, not as parents. Yet because most two-earner partners are raising kids, the tradeoffs posed by work are starker. If both parents work, who stays home when a kid gets sick? If both parents work, what happens to family finances when one leaves the workforce to raise a new baby or care for young children or elderly parents? The standard assumption is that all of these services can be purchased privately—that a sick kid can be cared for by a babysitter, an elderly parent by a nursing home. But the love of a parent or child is not something that can be bought in the marketplace, and in many cases it is nearly impossible to arrange private substitutes for family care. When both parents work, events within the family that require the love and care of family members produce special demands and strains that traditional one-earner families simply did not face.
Finally, women’s movement into the workforce has not just changed the character of parenting; it has also altered the economic relationship between spouses, encouraging greater equality within the household, but also increasing the ability of women to support themselves and children outside of marriage (despite the endurance of a substantial gender gap in earnings). Across the western world, divorce has become more common precisely when and where women’s participation in the labor force has expanded. This is not to suggest that law and culture are immaterial, only that the increased instability of American families has important roots in the expansion of female economic autonomy.
We can get a sense of the serious risks that these twin changes have wrought by looking more specifically at drops in family income. About half of all families in the PSID experience a drop in real income over a two-year period, and the number has remained fairly steady. Yet the median drop—larger than half of drops and smaller than half—has risen from a low of around 25 percent in the 1970s to around 40 percent. To track the trend more precisely, Professor Nargis and I ran a multivariate regression estimating the probability of at least a 50 percent drop in family income. Based on the time trend in the model, we can predict the probability of a 50 percent family income drop when all other variables are held at their means for each year. As Figure 2 shows, the predicted probability of a 50 percent or greater income drop among such “average” families has risen substantially since the beginning of the 1970s.