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Abstract

Public concern about economic insecurity has increased markedly over the last several decades. This paper assesses the extent to which this increase in concern has in fact coincided with increased risk to family income. Using data from the Panel Study of Income Dynamics, we examine changes in two indicators of income risk—the short-term variability (volatility) of family income, and the association between large income drops and destabilizing life events—over the 1970-2004 period. Our findings support the hypothesis that income risk has increased: the volatility of family roughly nearly doubled over the period, and destabilizing events became increasingly associated with large income drops.

Introduction

Compared with previous decades, the past 20 years have been characterized by remarkable stability in the economy as a whole, a trend some authors have gone so far as to christen “the Great Moderation.” Between 1985 and 2006, real per capita GDP increased nearly 50 percent, while the variability of GDP growth declined precipitously. These signs of macro-level strength and stability, however, have not translated into increased perceptions of economic security.

In fact, in many ways, Americans are more worried about the prospects that the economy presents them with today than they were before the Great Moderation. In 1982, despite a major recession, only 12 percent of Americans told pollsters working for the International Survey Research Corporation that they worried frequently about being laid off. By 1998, at the top of an economic cycle, 46 percent reported concerns about layoffs in response to the same question. Although worries eased somewhat in the early 2000s, the equivalent figure in 2005 was still 35 percent, nearly three times the 1982 level.

Interpreting public concern, of course, is a difficult enterprise. Although increased risk is one potential explanation for these poll results, it is also possible that the phenomenon is primarily psychological. Nevertheless, such polls have helped elevate the discussion of trends in economic risk to a prominent place in media discussions of public policy. In 2004, Peter Gosselin (one of this paper’s coauthors) published a series of articles in the Los Angeles Times that focused on the life stories of individuals experiencing large and sudden drops in economic well-being. Two years later, in 2006, Jacob Hacker published a book on economic risk that received wide attention in the popular press. President Bush joined the fray in October 2007, advancing his own explanation for the increasing worry over volatility in a television interview:

A couple of factors, I think, trouble Americans. One is that there’s a lot of churning in the job market. In other words, if you’re under 30, you’re likely to have had seven jobs by the time you’re 30. And older people like me take a look at that kind of volatility or some would call it excitement in the job market, and they wonder whether or not this job turnover is going to affect them.

Popular accounts have recognized the need for empirical verification of a trend toward increased economic risk. Gosselin and Hacker each choose a general measure of income volatility, defined in terms of income variability over time, as a starting point. Gosselin adapts his measure from a 1994 paper by Gottschalk and Moffitt; Hacker relies on a measure developed in a 1995 paper by the same authors.3 When applied to data from the Panel Study of Income Dynamics (PSID), a publicly available data set that tracks individuals over long periods, such methods show fairly large increases in the volatility of family income between the early 1970s (the earliest panel years for which consistent income information is available) and the early 2000s.

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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