Income Risk, Income Inequality and the Financial Crisis

• In Event: 493 - Regular Session. How Do the Rich Get Richer?

Abstract

This article investigates the drivers of income risk for American families across the income distribution over the last two decades. Using data from the Survey of Consumer Finances (SCF), three findings emerge. First, income risk has risen over time, primarily because the incidence of labor shocks such as job loss increased rapidly during the 2008 financial crisis and has remained elevated. By contrast, the frequency of capital shocks such as investment losses and non-market income losses such as from illness or family disruption have remained relatively constant. Second, different types of income risk have different distributions: capital shocks are correlated with income, non-market shocks are inversely correlated with income, and labor shocks have an inverse u-shaped relationship with income. Third, in the post-crisis era, the distribution of labor shocks has shifted upwards among working families, eroding the risk gradient separating the working poor from the middle class. Taken together, these findings point to a complex and shifting risk landscape: low-income working families have very different risk exposures than families on a fixed income, although the risk profiles of working families at different income levels are converging.

Author

• Michael David Nau, The Ohio State University