According to a new report from Pew's Economic Mobility Project, the likelihood that Americans experience a two- or ten-year income drop has been consistent over the last forty years. Recovery rates from those losses have also been constant—half of adults who suffer a two-year income loss of more than 25 percent recover within four years. However, half of those suffering such a drop over ten years fall permanently behind their peers and do not fully recover.
The report, “Ups and Downs: Does the American Economy Still Promote Upward Mobility?” was co-authored by labor economist Stephen J. Rose and Economic Mobility Project research manager Scott Winship. The authors examined the household incomes of adults aged 26 through 59, from 1967 through 2004.
“Over the last 40 years, the majority of American families who experience a short-term income loss have demonstrated incredible resiliency,” said John E. Morton, Pew's managing director of Economic Policy. “Yet still, there are those who fall behind their peers, unable to fully recover from longer-term losses over time. In light of the current economic downturn, policy efforts must focus more than ever on minimizing the drops and expediting recovery.”
The most recent two- and ten-year periods analyzed (2002-2004; 1994-2004) proved that while income fluctuations are normal, more Americans experienced a gain, rather than a drop. Fifty-eight percent enjoyed a ten-year income gain, 46 percent had a two-year gain, yet almost 40 percent suffered a two-year income decline. About one in five experienced a decline of more than 25 percent of their income between 2002 and 2004; and one in four experienced such a loss between 1994 and 2004.
“Contrary to the claim that there has been an increase in income volatility, the analyses find that over two-or ten-year periods, Americans are no more likely today to experience income drops than they were in previous decades,” said Winship.
More often than not, those who experienced a short-term income drop recovered from it. Of those experiencing a loss of more than 25 percent in 1994, nearly one-fifth recovered within a year, nearly one-third recovered within four years, while one-third failed to recover after ten years.
“The findings suggest that if the current downturn mimics recent ones, the economy will continue propelling most Americans upward, setting them back temporarily, if at all,” said Rose. “However, those who experience longer-term setbacks are at risk of a permanent hit to their economic standing.”
The risk of facing an income drop is similar for individuals across demographic groups. But, it is highest among couples that split up, and has become increasingly higher among men who separate from their partners, while the risk has decreased for women who separate, reflecting the narrowing gap between men's and women's earnings. Recovery from ten-year drops is most likely among college graduates and couples who live together.
Comprised of a Principals' Group of experts from the American Enterprise Institute, the Brookings Institution, the Heritage Foundation, the New America Foundation, the Peter G. Peterson Foundation and the Urban Institute, with guidance from an Advisory Board of leading academics and economists, the Economic Mobility Project seeks to investigate the status of economic mobility in America.
To find out more information about the Economic Mobility Project, please visit www.economicmobility.org.
By forging a broad and nonpartisan agreement on the facts, figures and trends related to mobility, the Economic Mobility Project hopes to focus public attention on this critically important issue and generate an active policy debate about how best to ensure that the American Dream is kept alive for generations that follow.