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.
Authors: Luke Basham and Khang Truong