September 24, 2002

Recession takes toll on living standards

The weakened economy of 2001 led to lower incomes for the middle class, more poverty, and greater income inequality, according to today's report from the U.S. Bureau of the Census.

Median household income (half of households have higher income, half have lower) fell 2.2% in inflation-adjusted terms, the first significant income decline since the last recession in 1990-91. The $934 loss sent household income down to about its 1998 level, reversing some of the gains made in the latter 1990s, when the robust economy was generating persistent income growth for most families.

The share of the nation's poor also expanded for the first time since the early 1990s, growing from 11.3% in 2000 to 11.7% last year, representing 33 million Americans. This reversal represents a dramatic shift in the living standards of the least-advantaged families. Between 1994 and 2000, the nation's poverty rate fell steeply, from 14.5% to 11.3%, reducing the poverty rolls by 6.5 million persons. Last year's increase in poverty added 1.3 million back to the ranks of the poor.

While prior recessions may have been worse in terms of income declines and poverty increases, the negative trends that began in 2000-01 are comparable to earlier losses. Furthermore, the weak recovery underway resembles that which followed the early 1990s recession, when poverty continued to grow and income stagnated or declined for four years (1989-93). Barring a sharp and unforeseen reversal in overall economic growth, the results in today's report signal the end of the economic progress of the latter 1990s and a return to much less dramatic gains in living standards for middle- and low-income families.

Another negative sign in today's report is the return to inequitable income growth. While the boom of the latter 1990s did not fully reverse the growth in income inequality, it did slow it down, as low and middle incomes grew more quickly and more evenly than they had in the 1980s or early 1990s. As shown in the figure, today's report reveals a clear return to growing inequality.

Although income growth among the most wealthy was faster over the 1995-2000 boom, the bottom 80% still saw growth of close to 2% per year. However, the latest data reveal a return to the "staircase" pattern of growth, with the largest losses at the bottom and the only growth being among the richest 5% of households.

Poverty appears to have grown mostly among adults, white persons, and Southerners (however, poverty increased significantly among black families, suggesting that black persons living alone saw fewer income losses). Median income, however, fell most in the Midwest, perhaps due to the sharp loss in manufacturing employment there in 2001. Such job losses may also explain the lack of real earnings growth for median full-year male workers, even while female earnings grew by 3.5%.

Although some commentators have described the 2001 recession as mild, today's report belies this assessment, as income, poverty, and inequality trends over the past year all show the significant negative impact of the recession on the living standards of American families. Hopefully these data will reinforce the resolve of policy makers to implement programs to protect those who have been hurt and to quickly return the economy to a faster growth path that lowers unemployment.

-Jared Bernstein

The Economic Policy Institute offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810.