Record Non-Employment Income

The Bottom Line: Income not related to unemployment rose from 15% in 1929, to 40% in 2008, meaning the today the US economy is much more resilient. Factor in that unemployment will never reach 25% as in 1929, the impact of a 10% unemployment will be ¼ of 1929, other considerations remaining constant.

Non-employment Income is defined as Interest on fixed income savings, dividends, social security and other government’s transfers, and pensions.

Non Employment Income as % of Total Personal Income represents today 38% of total personal income, compared to 15% in 1929.

click to enlarge

Not surprising with an aging and saving population, America has become less dependent on employment income to survive, something many are forgetting when analyzing recent unemployment data.

The upsurge during 1929-1935 is due to the massive decrease of employment income, as 25% of the population became unemployed.

But this upsurge proves an important point: interest, dividends and government transfers remained practically constant throughout the tough period. The recession of 1929 would have been much worse.

The main sources of non-employment income today are personal interest US$1.2 trillion, US$785 billion in dividends, government transfers US1.7 trillion [i][ii].

Will there be a downfall in these numbers? Quite likely but what’s falling now is marginal interest rates, as companies with lower profits strive to maintain dividends.

I did not make estimates of how much people will dip into their fixed income assets, or use money they had originally planned to save. This crisis contrary to 1929, is affecting more the upper half of society, investors, with a much lower propensity to consume than the average for 1929. Which means income decreases affects them less.

So I believe 40% is actually a conservative number, but give or take it does not really change the argument that follows:

A 25% unemployment rate on an 85% employment income based economy as in 1929, means 21% less cash flow, as a first approximation.

A 10% unemployment rate in 2008, if it should rise to such a number, on a 60% employment income based economy means only 6% less overall cash flow.

And since unemployment was already at 5%, we actually lose only 3% cash flow? If your company is planning layoffs in 2009, do they have these facts on hand, or are they acting on 1929 fears?

Comparing this recession as equal or worse than 1929, ignores the fact that America is older, richer, more resilient, and due to non-employment income, the initial impact will be only ¼ the severity of 1929.

We are entering a world depression thanks to academics than are constantly referring to 1929, ignoring 2008 data.

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[i] Percentage wise dividends remained constant at 5% of income 29 through today. Point to ponder.

Public companies have tended to prefer stock repurchases lately over dividend payments , which for the average investor may not be the exactly same.

Investors tend to consider dividends spendable money, but the stock appreciation of stock repurchases remains usually unspendable because it means for many “dipping into capital”.

That is why I did not factor stock repurchases appreciation into non-employment income, though non-employment income it is. Which may have put this overall income category near the 40% mark.

[ii] Another piece data I could not find, and would appreciate contributions, is 401 k and pension funds disbursement, which is not considered “income”, because it is actually money changing pocket sides. My estimate of 4% of income in 2007 from 401 k and pension funds was based on the fact that only 30% of Americans have private pension plans, but they are usually of higher amount than social security, the only aggregate data I have. Further refinements welcome.

Comments

[taojaxx:]

Achilles'heel (rather than heal) was his weakness. Non employment income is defined as the economy's strength. Am I missing something or is the title out of whack with the meaning of the article?
:)

2008 Dec 12 07:14 AM

[NanO49:]

You're kidding right? My 401K has lost nearly 25% of it's total value; my CD's are at blazing interest rates of 2%; I'm not even sure about my pension plan -- Okay, it's a joke, I get it. Ha Ha!

2008 Dec 12 09:35 AM

[notsosmart:]

for now the term should be "101k". actually a 25 % drop is not bad.

2008 Dec 12 10:17 AM

[Gedankonomist:]

"Not surprising with an aging and saving population, America has become less dependent on employment income to survive, something many are forgetting when analyzing recent unemployment data."

So how does this "non-employment income" come about? Does someone just wave their magic wand?

Of course not. The income results from people doing work. And if they do not work, then POOF! That income disappears too, magic wand notwithstanding.

2008 Dec 12 10:37 AM

[softomic:]

Somehow those numbers don't seem to align with the real world, at least in my circle of friends. I must be on the wrong blog.

2008 Dec 12 11:42 AM

[carey_jim:]

It isn't clear that the wealthy, who receive most of the income from dividends, interest and rent, will spend any more money in a recession or depression unless the government takes it from them in the form of taxes and uses it to create government jobs.

The percentage of people who receive most of the non-employment income from investments is very small sociology.ucsc.edu/who...

Also, as I've been saying in my last few posts, economic models are useful and necessary but they are only models. The real world is much more messy than our theories can account for.

2008 Dec 12 03:53 PM

[Jeff:]

Why do I even read this stuff. I hope the 8 trillion has at least one box with my name on it, then yes, I am with you Stephen, otherwise, please pass the joint you are smoking.

2008 Dec 12 05:00 PM

[GSlusher:]

"The Bottom Line: Income not related to unemployment ..."

What? Don't you mean, "income not related to employment"? It's hard to believe anyone who doesn't bother to proofread his articles.

This analysis probably means nothing, as non-employment income goes mostly to a few people.

"A 10% unemployment rate in 2008, if it should rise to such a number, on a 60% employment income based economy means only 6% less overall cash flow."

The author implies that non-employment income hasn't--and won't--decrease, which flies in the face of what has been happening, as Nan049 said. Indeed, changes in non-employment income may track or even exceed changes in employment income.

Income from employment may drop more than the unemployment rate as people are cut back in hours (especially overtime), lose second jobs, and pick up lower-paying jobs when the lose their primary jobs. They're still "employed," but making less money.

2008 Dec 13 01:28 PM

[Serviced Of...:]

I agree with most of the commenters, the numbers don't add up to the real world facts. Still a good read.

Apr 17 10:35 AM