Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…

…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….

I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….

I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….

About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….

My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…

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• U.S. Department of Labor, Commission on the Future of Worker-Management Relations (1994), ‘Contingent Workers,’ in Fact Finding Report.
• Steven J. Davis and Till von Wachter (2011), ‘Recessions and the Costs of Job Loss,’ Brookings Papers on Economic Activity, Fall, pp. 1-55.
• Jesse Rothstein (2012), ‘The Labor Market Four Years into the Crisis: Assessing Structural Explanations,’ ILRReview, vol. 65 (July), figure 11, p. 486.