Recession and Inequality

Megan McArdle writes:

[R]ecessions can make many, or even most people materially better off, because wages are sticky downward and prices are much less so.  Most of what recessions do is deepen the gap between the haves and the have-nots.  Those who have a job may experience declining costs and actually improve their purchasing power.  But the number of the unemployed rises, the length of the time required to find a new job stretches out, and the net decrease in their welfare far outstrips the moderate increase in the purchasing power of most consumers. 

I agree with the gist of Megan’s message here. But about that gap between the haves and the have-nots… My sense is that income inequality as measured by, say, the gap between the median of the bottom decile and the median of the top decile, has fallen sharply due to super-huge finance-related losses at the top. I’m pretty sure this big tumble at the pinnacle swamps the small gains in real wages for those with steady jobs. So the gap between the haves and the have nots may have narrowed overall, despite rapidly climbing unemployment. But who cares?! Maybe now some egalitarians will grasp the irrelevance of Gini-style measures. The fact that inequality tends to decline during recessions isn’t some kind of silver lining of recessions. In recessions, lots of people suddenly become have-nots, and that’s a serious problem whether or not the have-a-lots are more than proportionally slammed. Once the economy, and income inequality, starts to pick up again, the real problem will the same as ever: the opportunity and welfare of the have-nots, not some silly, meaningless ratio.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center