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The Great Recession and Inequality

Amid the dark clouds of the Great Recession, more than a few people have identified a possible silver lining--reduced inequality in America. Job losses on Wall Street, and talk of reining in executive pay and raising taxes on the wealthy, suggest at least a temporary end to rapid growth of salaries at the highest end of the market--a trend which produced the highest share of income on record for the nation’s top 10 percent of families in 2007.

But this is short-term thinking at best. Besides, is reduced income inequality so great if all it means is that the super-rich are getting whacked more than the poor? Indeed, the character of this recession suggests that it could actually accelerate a longer-run increase in inequality, especially among workers with different skill levels.

The chart below offers some initial evidence on this question. For each major industry, it compares job loss over the course of the recession (the vertical axis) to wage inequality, measured as the ratio of the wage at the 90th percentile of the industry distribution to that at the 10th percentile of the industry distribution (the horizontal axis). Bubbles are sized by the number of jobs in the industry as of September 2009. Here’s the breakdown:


  • Most industries with more unequal pay--higher-end services, health care, education, even finance--have shed fewer jobs than average, or have actually added jobs, over the past two years (the upper-right quadrant). These include industries like health care that tend to pay their highly-educated workers (e.g., neurologists) several times more than their less-educated workers (e.g., home health aides). 
  • Most industries with more equal pay--lower-end services, transportation, and especially construction--have shed more jobs than average. Many provide decent-paying jobs to moderately-skilled workers who have at least a high school diploma, but not necessarily a four-year degree. (Accommodation, retail, and arts/entertainment provide an exception, but they also pay less than $20/hour on average, such that their relatively better jobs performance isn’t doing much to cushion workers at the bottom).
  • Two big sectors occupy the middle of the inequality distribution--government and manufacturing. Some of the metropolitan areas with the lowest levels of wage inequality are (or were until recently) manufacturing centers. Government employment over the course of the recession has been relatively stable, while manufacturing jobs are down a whopping 15 percent. Despite their similar wage inequality profiles, average skill demands for government jobs are higher than for manufacturing jobs; in 2000, 35 percent of public administration workers had a bachelor’s degree, compared to only 21 percent of manufacturing workers.

This pattern suggests that the shifting mix of jobs alone during this recession could produce greater earnings inequality. That noted, it’s not altogether immutable. Many laid-off, lower-skill workers are going back to school in attempts to position themselves for better-paid work. The federal government is making big investments in infrastructure (e.g., high-speed rail, smart grid) and “green jobs” that could create decent-paying opportunities. Future job growth in higher-inequality sectors could enhance earnings equality if, for instance, public policies promote unionization. And some of the more equal-paying industries will regain their footing once economic growth is restored--transportation jobs, for instance, should increase once trade picks up.

But it’s also the case that manufacturing and construction job levels before the recession will not resurface anytime soon. Given looming budget deficits across the board, government employment cannot pick up the slack. Even retail employment may not recover so swiftly given a sharp rise in the savings rate, which many believe is more than a short-run phenomenon. So this recession may prompt a decided shift in the American economy toward jobs that entail greater earnings inequality. This would echo research which finds that recessions amplify long-run trends in inequality, contributing to greater inequality during periods in which it had been increasing (like the current one).

What’s more, the only period in the last 30 years that saw narrowing inequality due to greater income gains at the bottom than at the top was the late 1990s--a period of sustained economic growth and low unemployment for historically disadvantaged groups (like black men and female heads of household). Now CBO projects that it will be 2014 before the unemployment rate once again reaches its 2007 level--and we’re already seeing huge disparities in outcomes among workers with different levels of education. Given all that, policies to accelerate education and skills acquisition among lower-income workers and children, and to redistribute economic gains to the less well-off, will remain critical to efforts to stem rising inequality in years to come.