The Income Rollercoaster: Rising Income Volatility and its Implications

Karen Dynan
Karen Dynan
Karen Dynan Professor of the Practice of Economics - Harvard University, Nonresident Senior Fellow - Peterson Institute for International Economics

April 1, 2010

Millions of U.S. households have suffered devastating income disruptions as a result of the recent economic downturn. As of late 2009, eight million jobs had been lost to the recession, and one in ten workers was out of work, putting the unemployment rate at its highest level since the early 1980s. Although a variety of indicators suggest that the recession is now over, most analysts foresee a slow and gradual economic recovery and consequently a long, uphill climb back to full employment. Thus, it may be a number of years before the incomes of many families are back to normal. Policymakers have already taken some steps to support these families and stimulate job creation, and they continue to deliberate about what additional steps are still needed.

These short-term swings in income have occurred against a backdrop of equally notable long-term trends. A growing literature has explored longer-term trends in household income fluctuations, and although not every study agrees, many suggest that U.S. households have seen a significant rise in income volatility over the past several decades. For the most part, this increase occurred even as the volatility of aggregate economic activity appeared to be moderating. That is, while households have had to deal with increasing year-to-year flux in the amount of income available to them, the total value of U.S. economic activity has, since the early 1980s, been showing less year-to-year variation than in earlier times (even including the recent recession). In this article, I document the increase in income volatility among U.S. households. I then discuss how these results square with macroeconomic trends and explore the implications of rising volatility for family well-being, particularly in the context of other important long-run changes in family finances.