Skip to content

Wages and Income: A Recession Paradox

Above is a graph illustrating average personal incomes from 1956 to present, with grey regions indicating periods of recession. It is noteworthy that even during recessions, personal income tends to increase, albeit often at a slower rate. The prime exception to this is the 2008 Great Recession, in which economic factors were so great that they led to a decrease in personal income. This phenomenon was not incredible in and of itself; it simply served to prove that the 2008 recession was of a greater magnitude than those prior. What is interesting is the trendline for wages during that same time period, pictured below.

Between the beginning and end of the recession, median earnings didn’t simply increase, they increased at a faster rate than they did during nearly any other period. While this would intuitively seem anomalous, closer inspection reveals that median wages and salaries have a tendency to increase during most recessions. We would therefore like to present a few possible explanations to this discrepancy.

One potential contributing factor is the increase in layoffs during a period of recession. If a firm lays off employees, the employees statistically most likely to be laid off are those on the lower end of the pay scale. Since the BLS considers many of these laid off individuals to now be unemployed [or NILF], they are removed from the wage calculation. With fewer individuals from the bottom half of the income distribution in the labor force, median real wages actually increase, even though total personal income simultaneously decreases.

On top of this, it is important to note that the above graph lists median wages of full time employees and does not illustrate the masses of people employed part-time, whether voluntarily or as a result of the recession. Consider the graph below. The number of people holding part-times jobs doubled during the Great Recession. The “percent change from a year ago” for part- time employment hit an all-time high during the Great Recession. From the beginning of the recession until the end, part-time employment rose ~95%. Full-time employment dropped ~7% during the same period.

Both of these forces go hand in hand. Median real earnings for those employed full-time increased during the Great Recession. Given the simultaneous drop in personal income, this seems counterintuitive at face-value, but can be logically explained economically. During rampant increases in unemployment, lower-wage individuals make up increasingly less of the labor force pie. This, coupled with the shift of millions of workers from full to part time employment (or out of the labor force completely), help account for why personal income and other economic factors changed in the manner they did during the Great Recession.

Sources:
https://www.bls.gov/cps/cps_htgm.htm
http://macroblog.typepad.com/macroblog/2017/07/another-look-at-the-wage-growth-trackers-cyclicality.html
http://www.economist.com/node/330089

Who Is Hurt Most by Unemployment in a Recession?

Authors: Luke Basham and Khang Truong

17 thoughts on “Wages and Income: A Recession Paradox

  1. denatalec20

    It definitely appears paradoxical that the average income would increase during a Recession. It is important to note that this trend does not apply to hourly workers; at first, when I read that the average wage increased, I was picturing part-time workers at fast food restaurants or sales persons suddenly receiving a raise.
    It absolutely makes sense that the lower salaried--therefore, more likely less experienced and less established at their place of work--would be the first to be let go during times of economic hardship.

  2. mitchelld20

    It is interesting to look at the first graph of average personal income from 1956 until now with respect to the recessions. The incomes did not seem impacted by these recessions until the great recession of 2008. I wonder what differences other than the housing crisis resulted in such a steep decrease that did not occur in any of the other recessions. As we learned, productivity was increasing from the post world war 2 boom until 1973, but even after 1973 personal average income kept increasing even with the recessions and the decrease in productivity.

  3. mizeo20

    Due to the severity of the Depression, and the Great Recession being the only recession of a similar magnitude, one could infer that the Great Depression (starting in 1929) saw similar/ even more dramatic trends in personal income and wage growth than the 2008 recession. Though the time period is not listed, it would make sense that it personal income would fall off dramatically (even more so because the sheer amount of individuals that were unemployed) and that wage growth would skyrocket because the minuscule amount of individuals employed. However, I am unsure if the part-time employment would spike so sharply as it did in 2008. Were the jobs so scarce that there wasn't even part-time work available?

  4. Kaitlyn Fitzsimmons

    I never would have expected medium wages increase during recessions but the explanation makes complete sense. This just shows how important it is to have many different measures of unemployment, or any other subject you are trying to measure. It’s not difficult to find a graph or chart to dissuade readers into thinking one thing, while another graph on the same issue, re-worded or re-worked slightly, can tell another story.

  5. laniere20

    When first reading the blog post, it seemed almost impossible that average wages would increase at such a high rate. It makes sense that after lower paid workers are laid off and only high salary workers remain that average wage would go up, but one would think that even the salaries of higher paid workers would decrease during a recession. It does however make complete sense that the number of people working part time hours would increase. During the recession, those struggling to find a full time job would most definitely take a part time job over no job at all. One questions I have is how long it takes the number of people working part time jobs to return to its original pre-recession number after the recession?

    1. the prof

      see my graphs / calculation on "normal" levels of part-time work. the answer appears to be: 8 years when the recession is a really bad one driven by real estate

  6. mcconnellm20

    It is very interesting that average incomes increased during recessions. That is not something I would have suspected. The reasons for why average income and median wage would increase make sense when you think about it. It makes sense why workers who are making less money are the ones to get laid off. Also, it is interesting that the graph only includes full time workers. Part time workers make up a large part of the labor force especially during a recession.

  7. Julia Moody

    It definitely surprised me that the median earnings increase during recessions because I would have thought that employers would have had less money to pay their employees with. However, I forgot that employers would have been laying off the less skilled workers who receive lower wages, bringing the median earnings up. I think the graph is a little misleading because a lot of people are losing their jobs who would have no income in a recession.

  8. murrayc20

    A recession is known as a time period where there is a business cycle contraction, which results in a general slowdown in economic activity. Frequently, GDP growth slows or even decreases. Prices and unemployment rises due to firms' inability to keep prices low and keep the same workers employed. Even though there is an economic contraction, incomes can rise, according to these graphs. This is certainly paradoxical because one would think income level would decrease during hard economic times. There are a few possible explanations for this:

    Due to the economic downfall, companies lay off workers. With less workers, companies can pay the remaining workers a little more. It could be used as an incentive to them keep working hard during a time of hardship. However, GDP still slows because there are many more people out of work than before that cannot contribute to economic stimulation.

    A more realistic explanation for the higher wages is that with prices and inflation high, employers have to compensate with higher wages for the remaining workers. So in reality, those that sill have a job may be gaining a higher monetary value, but their purchasing power is still the same or lessened (depending on the severity of the price increases and inflation rate).

  9. litvaka20

    Prior to understanding the nature of income and unemployment, I would have assumed that personal income would significantly decrease during recessions. It is interesting that throughout every recession, beginning in 1956, there has been an increase in personal income, excluding the Great Recession after May of 2008. However, due to the way in which personal income and the unemployment rate are calculated in the U.S., the graph of personal income does not give a good sense of whose income was actually affected during the recession, for example, those who were fired from their jobs. Since the graphs only depict the personal income and type of employment for individuals, it gives a false sense of how well individuals are doing during an economic recession. It would be necessary to also look at unemployment graphs to see how they increase throughout these periods. This would give a broader picture of how income is increasing for those who remain employed, while the unemployment rate would depict how significantly the recession affected those who lost their jobs.

  10. smithg20

    Although the initial idea that throughout economic recessions, average personal income increases seems paradoxical, the explanation explains the discrepancy. In economic hardships, companies would naturally look to lay off lower paid workers first and keep their higher paid and higher skilled workers on payroll. This strategy would thus manipulate the average personal income rates as those let go by companies would now be counted as unemployed. I was also interested in what made the 2008 recession different, in that average personal income rates did not increase as they did during other economic recessions. I also think this proves a broader point about analyzing data in graphs. While it can be tempting to view graphs at face value, it is important to analyze and question to figure out what factors contributed to the pattern depicted in a graph.

  11. Ruofan Shen

    I really like this article. It surprised me at first because of the counterintuitive result. However, after I went through all these data and graphs I realized what was confusing me. The method of wage calculation does' t take part-time job into account. So in the future, when looking into a problem or a confusing phenomenon, it is necessary for one to pay attention to all the possible factors including what data can't reveal. Because all the factors go hand-in-hand.

  12. Ellie Bradach

    I think the the first graph is very interesting because it shows that the graph of personal income is most completely related to a exponential graph. I wonder why it is that personal income has shot up in the past decade while growing more gradually during the 60s and 70s. This could be due to more jobs available in general, the increase in white collar, higher paying jobs as opposed to blue collar jobs, or just more people. If we think about this an an exponential graph as well, it begs the question if personal income will just continue to rise or will it eventually flatten out.

  13. gianakosa20

    Does the data suggest that, during recessions, wages actually increase, or merely stay the same for higher paid workers? It's assumed that companies let off their lower-earning employees, so does this data just reflect this? I'm wondering if this is accounted for in the data.

  14. compolir20

    These graphs definitely suggest a continuous rise in average personal incomes and median wages earned. These increases can seem even more surprising with the understanding that inflation rates decrease during recessions. When looking at recessions specifically, the data does not provide a transparent picture of what is happening without looking at the overall unemployment rates. These people are very much apart of society, so it would be interesting for the article to include some sort of unemployment chart to accompany the personal income graph for a more encompassing view of the overarching economic situation.

    1. andersons20

      To further your point regarding inflation rates decreasing during recessions, it is very important to note that the major cause of recessions is more often than not inflation. With prices of goods and services increasing as a result, it is hard to argue that inflation is not the biggest underlying factor of average personal incomes and median wages increasing. Inflation is why the recessions occur, and ultimately why the lesser paid (and lesser valued) workers are let go as businesses trim costs to stay afloat. For example, prices have increased 800.0% since 1956 and 197.1% since 1980. The only way for businesses to adapt is letting lesser paid workers go, effectively driving up both median wages and average personal incomes. Therefore, it is imperative that one takes into consideration unemployment rate increases with median wages and average personal incomes increases. Although paradoxical in some aspects, this phenomenon strongly requires several data points to be considered.

      http://www.in2013dollars.com/

      1. the prof

        I'm not sure we can find a recession in the US caused by inflation – but we can find ones (eg under Paul Volcker) that were caused by policies intended to lower inflation. cf. the discussion of the Phillips Curve.

Comments are closed.