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What happens to family income in a recession?

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A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for November 7, 2001.

What happens to family income in a recession?
It is now widely agreed that the American economy is in recession. Since it has been a decade since the last downturn, it is useful to revisit past periods of falling output and rising unemployment to get a sense of how these trends affect living standards.

The figure below shows how real family income fluctuates in periods of recession and recovery. The first bar in each time period represents the percentage-point change in the unemployment rate, which rises in a recession and falls during recoveries. The other bars in the figure represent the percent growth in income for low-, middle-, and high-income families (corresponding to the 20th, 50th, and 95th percentile in the income scale).

Recessions and recoveries: Changes in unemployment and income

As unemployment increased in the recessions that occurred in the early 1980s and 1990s, real income fell most quickly for the lowest-earners. Note also that over the recovery of the 1980s, low-income families gained less than middle- or high-income families (giving rise to the sharp increase in income inequality over these periods). Thanks to the uniquely tight labor market conditions that prevailed in the latter 1990s, this pattern of growing inequality reversed to some extent (although income growth of wealthy families continued to outpace that of all other earners).

If history is any indication, the onset of the current recession will certainly lead to lower incomes for those at the bottom and middle of the income scale. Relative to the wealthy, these families are most vulnerable to swings in the market economy. Helping them maintain the recent gains in their living standards should be a focus of the economic stimulus package currently under debate.

This week’s Snapshot by EPI economist Jared Bernstein.

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