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Jobs, Not Wage Growth, Are Key for Recovery

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Jobs, Not Wage Growth, Are Key for Recovery

December 18, 2013

In a new National Bureau of Economic Research working paper entitled Accounting for Income Changes over the Great Recession, Cornell University professor Richard Burkhauser and his coauthors Jeff Larrimore and Philip Armour conclude that incomes declined less during the Great Recession

than they did in the early 1980s. Recent decreases in median income came from lower employment, not wages. These findings have profound policy implications. 

The authors show studies relying on Census Bureau figures greatly understate the resources available to low- and middle-income Americans. The value of noncash transfers such as SNAP benefits (food stamps) are excluded from the Census Bureau’s measures of pre-tax income. Changes in tax policy, such as increased credits or exemptions or reductions in payroll tax rates, are excluded as well. These are important components of household income—especially for those hit hardest by economic downturns.

By using more accurate data, Burkhauser and his coauthors find the main problem of the Great Recession and its recovery is declining employment rates—not declining incomes. 

Their main period of comparison is the 1979-1982 recession, which in some ways was as severe as the Great Recession. Full-time primary male workers’ mean earnings dropped four percent over this period, compared with a one percent increase from 2007-2010. The increase in the most recent period conforms with Scott Winship’s results in a recent paper on income trends. From 1979-1982, the decline in employment was much smaller than the decline from 2007-2010. 

These data show that median income declines during the 1979-1982 recession came from a substantial decline in individuals’ earnings, whereas the Great Recession’s declines were driven by lower employment. The common belief is that earnings, especially those of the poor and middle-class, have fallen substantially—a belief this research shows to not be the case.

Government transfers increased 72 percent during the Great Recession, compared to a slight fall during the recession of the early 1980s. Even though these programs target low income groups, they had a noticeable impact on the middle-class as well. Forty-two percent of the total change in income was offset by government transfers in the 2007-2010 period, compared with less than 5 percent from 1979-1984. Excluding this income, as the Census figures do, does not show the whole picture.

Similarly, ignoring the effects of changes in taxes obscures the level of real income. Increases in tax liabilities led to reduced median income during the early 1980s recession. Decreases in tax liabilities during the Great Recession increased median income by 2 percentage points.

Tax legislation enacted during the Great Recession was targeted more towards low income households. For the bottom quintile, reduced tax liabilities due to changes in tax policy accounted for more than a 3 percentage point increase in mean income. But for the top quintile, tax policy changes only accounted for less than a quarter of a percent increase in their mean income.

When the median income increases from tax changes are combined with those from public transfers, incomes fell less during the Great Recession than they did in the early 1980s.

Decreasing primary male employment accounts for the largest part of the decline in mean post-tax income for those in the bottom fifth of earners. In the top quintile, the decline in investment income accounts for the largest part of the fall in mean income. If Burkhauser’s data is ignored, the most vulnerable are the most harmed.

The authors conclude by stating, “Growth in post-tax median income over the remainder of the current business cycle will depend on the ability of currently under- or non-employed individuals to find full-time jobs in a growing economy as we scale back these temporary public-transfer programs which limited median income declines over the Great Recession.”

Policies aimed at increasing earnings through labor regulation are misguided. Lack of job opportunities pose a greater problem that declining incomes. Policies that make job creation easier should be embraced if the problems from the Great Recession are to be fixed. Those that hinder job growth should be repealed. 

While direct government transfers served their purpose over the recession, they now run the risk of doing more harm than good by providing work disincentives. Burkhauser and his colleagues’ findings suggest that programs such as extended unemployment insurance and expanded SNAP coverage and benefits could have lengthened unemployment spells and thereby lowered labor-market skills. These short-term increases in benefits make returning to work less appealing (for more on this topic see Burkhauser’s review of Casey Milligan’s book The Redistribution Recession: How Labor Market Distortions Contracted the Economy). Tax reductions and increased transfers also increase public debt, which has negative long-term consequences. 

The safety net did its job during the economic downturn—it kept individuals’ earnings from falling. Now that the economy is recovering, albeit slowly, trims to programs that served their purpose, such as food stamps and unemployment insurance, should be considered before negative consequences overshadow the benefits.

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