If so many people are out of work and on the edge of eviction or foreclosure, how come we’re not seeing more evidence of economic disaster? Why hasn’t it spread throughout the economy? Why aren’t things worse than they are reported to be?
The answer is disturbing. And simple.
It’s all about income. If your income is modest and you lose your job, it has a devastating effect on you personally. But maybe only you.
It’s just the opposite when the job losses start at the top of the income pyramid. If you make the big bucks and your job goes away, odds are lots of other people will feel your pain. They’ll know your income is gone because it won’t become part of their income.
Think about it. If you are doing well and suddenly lose your job, your travel agent may be the first person to know.
You cancel your regular vacation in the islands.
You buy less wine.
You eat out less.
You delay buying this. Or that.
Lots of regular spending gets slowed or suspended altogether. Before you know it, dozens of people have been directly affected by your income loss. If gains in income “trickle down,” so do losses of income.
We know all this. Kind of.
Examine it more closely, and we can actually measure the power of income differences. It comes down to a simple principle:
The greater the difference between the highest and lowest incomes, the greater the impact if those at the top lose their income. And the lesser the impact if those at the bottom lose theirs.
You can understand this by examining the Internal Revenue Service data on income. A close look at their figures on the distribution of income among American taxpayers tells us a lot.
If you’re among the haves, you don’t need statistics to be informed. All you need to do is look at your net worth.
Stocks dropped and then recovered. Home prices continue to rise in most of the country. Ownership of both is a must for the haves and a never-never land for the have-nots.
It’s the same with income. It continues to rise for the haves, both in absolute amount and in proportion of all income.
Back in 2001, the top 10% of earners received 42.5% of all income. The bottom 50% received 14.4%. In 2017, the most recent year for which the IRS has figures, the top 10% received 47.74% of all income. The bottom 50% received 11.25% of all income.
The entry income required to be in the top 10% of earners in 2017 was $145,135. Income below $41,740 put you in the bottom 50%.
Now let’s translate those figures into losses of income for the economy. If 20% of all workers in the bottom 50% of earners lose their jobs, unemployment will be 10%. A 10% unemployment rate hits hard. But the loss in purchasing power is only 2.25%.
That’s not a big number. It wouldn’t mean much for the 90% of all workers who remained employed.
If job loss comes from the have side, the impact is far greater. If 20% of all workers in the top 10% lose their jobs, unemployment will be only 2%. But purchasing power will decrease by 9.54%. That’s about four times as great an impact on the economy. To have the same raw dollar impact on the economy as a 20% job loss at the top, 85% of all workers in the bottom 50% would have to lose their jobs.
That would be an unemployment rate over 42%. A depression, and then some.
None of this is a surprise. It’s just arithmetic.
While there have been job losses in most of our economy, they have been concentrated in sectors with relatively low wages: leisure and hospitality, restaurants, bars, health services and retail trade.
The problem is that what’s simple arithmetic to a have is an existential threat to a have-not.
Scott Burns is the creator of Couch Potato investing and a longtime personal finance columnist for The Dallas Morning News.
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