- While the positive/negative economic effects of inequality remain debatable, there is no doubt that the Great Recession has worsened the inequality situation.
- Large increases in wage inequality as a result of a recession are new.
- Higher-wage earners recovered from the Great Recession much faster than the rest of the economy, resulting in an increase in wage inequality.
- Retailers that cater toward lower wage earners will likely do better in the longer run than stores that cater more toward medium wage earners.
The rising level of inequality has been a talking point in the news for some time now. However, it ratcheted up several notches after President Obama advocated for a higher minimum wage in his "State of the Union" address in January and the provocative book, Capital in the Twenty-First Century, authored by French economist Thomas Piketty, was released in March. While the positive/negative economic effects of inequality remain debatable, there is no doubt that the recession has worsened the inequality situation.
A few years ago, the BLS started releasing average hourly wage data of all employees for 489 different industry and job types on a monthly basis. Using this data, real aggregate earnings were determined by multiplying the total number of hours worked for each job by the average hourly wage. Average hourly earnings were calculated using total number of hours worked, not payrolls, as weights.
Three categories were devised so that each category consisted of about one-third of the total hours worked. Jobs offering an average hourly wage that was a half standard deviation above the mean were categorized as a high-paying job. Those jobs that had wages a half standard deviation below the mean were labeled low paying. The rest were medium jobs.
In the end, there were 126 high-paying jobs, 226 medium-paying jobs, and 137 low-paying jobs.
Medium-paying earners fared the worst from the Great Recession. During the recession, aggregate earnings for medium-paying jobs fell by $4.9 tln. In the subsequent recovery, the medium-wage workers gained $2.6 tln by the time total real aggregate earnings recovered the entire recession loss. In all, the recession cost these wage earners $2.3 tln.
All of the medium-paying earnings loss was recovered by high-wage earners, who saw aggregate wages increase by $1.7 tln. Unfortunately, this was not the result of medium-wage workers transitioning into higher-paid jobs.
Every high-paying jobs lost during the recession was recovered and another 362,000 jobs were added. Payrolls for medium-paying workers remain 2.0 mln below their pre-recession level. Obviously, there were very few workers who were able to step up into a higher-paying job.
That contrasts with the low-paying category where the job recovery outweighed the losses from the recession by nearly a two-to-one margin. In effect, medium-paying wage earners were forced to take lower-paying jobs during the recovery.
Large increases in inequality as a result of the recession are new.
Data constraints make it impossible to use the BLS "All Employees" dataset to evaluate prior recessions since it only goes back to 2005. Instead, we use the BLS' hourly wage data for production and nonsupervisory employees, which goes back to 1990 and incorporates 83% of all private payrolls in April 2014 for 435 industry/sectors.
This dataset is generally biased toward lower and medium-paying wages because higher-paying manager and supervisor jobs are not included in the data set. Hence, we expected to see medium and low-paying earners recover their wages faster than high-wage earners due to sheer numbers.
Surprisingly, that was not the case in the 2001 recession/recovery period.
It was again a slower earnings recovery for medium-paying jobs than the high and low end. During the 2001 recession, medium-paying wages fell by $1.3 tln but only gained $1.2 tln in the ensuing recovery. The lost wages were all recovered by low-wage earners.
Like the Great Recession, payroll gains came predominately from the low-paying sector. Neither medium nor high-wage jobs recovered all of their payrolls by the time total aggregate earnings lost during the recession were fully recovered.
Earning recovered more quickly for medium and low-wage earners than high-wage earners following the 1990 recession.
Likewise, payroll gains were much stronger for medium and low-earning jobs.
Yet, the effect on wage inequality following the 1990 and 2001 recessions was minimal.
Using the real aggregate earnings for nonsupervisory/production employees, we calculated Gini coefficients at the start of each recession and at the end of the recovery. An increase in the Gini coefficient represents an increase in inequality.
All of the recessions produced an increase in wage inequality, but there was a vast difference between the effects of the Great Recession and the prior two recessions.
The question now is whether the increase in wage inequality is hindering the economic recovery.
Obviously, many employees making medium wages prior to the recession are now living on a smaller income base. Their spending habits have changed and their consumption growth has suffered.
What is not so obvious is if higher earners increased their marginal propensity to consume to pick up the consumption slack from medium earners.
Total real aggregate income in the economy has not changed since the recession began in 2008. It is possible that higher wage earners are spending more. Overall consumption growth trends may be no different than if the medium wage earnings recovery was similar to the recoveries following the previous two recessions.
On the micro level, the increase in inequality will have an effect on the prosperity of different retailers. Stores that cater toward lower wage earners, such as The Family Dollar Store (NYSE:FDO) and Wal-Mart (NYSE:WMT), will likely do better in the longer run than stores that cater more toward the medium wage earners, like Target (NYSE:TGT) and Macy's (NYSE:M).
The economic impact of increasing inequality is debatable. What is not debatable is that higher-wage earners recovered from the Great Recession much faster than the rest of the economy, resulting in an increase in wage inequality.