The Incidence of Unemployment and Underemployment, by Income

As we ponder the plight of the over-$250K household income group (see the poignant story here), I think it worthwhile to examine the unemployment and underemployment rates for lower-income households. In researching statistics for our forthcoming book, Lost Decades, Jeff Frieden and I stumbled upon this study by Andrew Sum and Ishwar Khatiwada, with Sheila Palma, of Center for Labor Market Studies at Northeastern University. They characterized the mid-2010 employment situation as “A Truly Great Depression Among the Nation’s Low Income Workers Amidst Full Employment Among the Most Affluent”.

We asked the authors for an update of their results, and they kindly obliged. Below, we present a graph of unemployment and underemployment rates, for the January – August 2010 period, conditional on household income in 2008 in the preceding 12 months [corrected 10/6/10, per clarification from A. Sum].
sum1.gif

Figure 1: Unemployment rate (blue) and underemployment rate (red), for January-August 2010, based on household income over the previous twelve months [corrected 10/6/10]. Blue dashed line is average unemployment rate for entire sample; purple dashed line is average unemployment plus underemployment ratio for entire sample. Source: Calculations based on estimates provided by Andrew Sum and Joseph McLaughlin.

The authors also estimate a group that is marginally attached to the labor force, which might be thought of as discouraged workers.

…Our third labor market problem group consists of members of the so-called labor force reserve or overhang. These are individuals who were not actively participating in the labor force but who expressed a desire for immediate employment….

The authors note in footnote 10, “The labor force reserve should not be confused with the BLS concept of the marginally attached. The latter group are a subset of the labor force reserve who have looked for a job in the past year and were available to take a job.” We can recalculate the ratios as a share of (labor force+labor force reserve). This calculation yields the following graph.
sum2.gif

Figure 2: Unemployment (blue), underemployment (red), and labor force reserve (green) as ratio to sum of labor force and labor force reserve, for January-August 2010, based on household income over the previous twelve months [corrected 10/6/10]. Blue dashed line is average unemployment ratio for entire sample; purple dashed line is average unemployment plus underemployment ratio for entire sample; teal dashed line is average unemployment plus underemployment plus reserve ratio for entire sample. Source: Calculations based on estimates provided by Andrew Sum and Joseph McLaughlin.

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37 thoughts on “The Incidence of Unemployment and Underemployment, by Income

  1. C Thomson

    A powerful argument indeed for a greatly expanded national birth control program. Congratulations to all concerned for highlighting this!
    It would be fun too to overlay the income data/unemployment data with education data such as percentage of high school drop-outs in each income group.

  2. Paxz

    These numbers are shocking. I honestly have trouble accepting their validity. In my mind, we would be seeing several riots in the inner city if these numbers were accurate. Although I suppose the extensions to unemployment insurance are making the situation bearable for most households.

  3. dryfly

    “In my mind, we would be seeing several riots in the inner city if these numbers were accurate.”
    Been to Detroit lately? These numbers have been around big inner cities for DECADES. Its the bulge in the well educated middle class that is new and ‘shocking’. Where do they go to riot – the malls?
    Get used to it – it is not going away soon.

  4. Jake M.

    Actually, can we compare this table to their Mommy and Daddy’s income? I’m guessing the correlation is pretty strong, and it ain’t necessarily because of good genes. And it’s probably a whole lot stronger than it was 30 years ago (what changed? :P).
    Ignoring class as the biggest determination of success in this country guarantees that this two-tiered result will continue. And an economy with 70% of it based on consumption cannot consistent grow if a sinificant group is seeing their standard of living decline.

  5. NSS

    If you change the axes of your diagram you’ll see that your earthshaking conclusion is a restatement of the obvious:
    Unemployed people have lower family incomes.
    My freshman English Composition professor would have written a big “NSS” across the top of my paper had I written this.

  6. Menzie Chinn

    NSS: If you’d read the notes to the graphs a little more carefully, you would not have written what you wrote. The incomes are for 2008, and unemployment rates are for the first eight months of 2010. Unless there is time travel, the unemployment status in 2010 cannot “cause” the income level in 2008.

    Now there is a separate issue of serial correlation — that is people who were unemployed in the first eight months of 2010 were likely to have been unemployed in the last quarter of 2008, and hence there is a correlation induced there. But that is not a “spurious” correlation, but perhaps a correlation (if it is nonzero) that we are interested in identifying.

    I don’t know what your English Comp prof would have written on your paper, but your reading comprehension instructor might have written something like “try again”.

  7. tj

    I would love to see a regression of the probability of transitioning from unemployment to employment on a set of explanatory variables that includes government payments. What is the marginal gain to employment for some of those folks? You gain a low wage job, and give up various government benefits.
    I don’t care if Obama wants to raise taxes on individuals earning more than $200K (the rich?) Can someone explain to me how that will create jobs for those underemployed folks in the charts above?
    I’m listening…

  8. Cedric Regula

    tj
    The Bush tax cuts were set to expire in 2010, because after 10 years they would have created tremendous growth, no more poor people, and the resulting tax base would balance the budget.
    So here we are. What was that question again?

  9. Dave Schuler

    A remarkably large proportion of those earning $150K or more are doctors of medicine. I’d be interested in seeing that income group divided between healthcare providers and non-healthcare providers.

  10. 2slugbaits

    tj I don’t care if Obama wants to raise taxes on individuals earning more than $200K (the rich?) Can someone explain to me how that will create jobs for those underemployed folks in the charts above?
    Well, one rather obvious way would be if Obama took the increased tax revenue from high income low, MPC earners and used it to increase government spending dollar-for-dollar. In other words, an example of the old textbook balanced budget multiplier. The multiplier would be greater than 1.00 because nominal short-term interest rates are at the zero lower bound and the Fed isn’t likely to sterilize things. The stimulus effect would be slightly greater than the contractionary effect of higher taxes. Result: increased aggregate demand and higher employment. And it wouldn’t increase the deficit one penny. Still listening?

  11. W.C. Varones

    Well, one rather obvious way would be if Obama took the increased tax revenue from high income low, MPC earners and used it to increase government spending dollar-for-dollar.
    Ah, more naive leftism, blind to the incentive effect that marginal tax rates have on business formation and employment.
    If we only have smart enough Keynesians telling everybody what to do, we’ll achieve Utopia.
    How’d that work out for the Soviet Union?

  12. Tom Maguire

    Great – compared to what? Absent graphs for 2006 (as requested above) or other time periods, I have no idea whether this recession has hit high earners harder or less hard than past recessions.
    Now, if anyone is surprised that low earners also tend to have more transient income, well, welcome to Earth… I think. As noted, I have no data to support that preconception, either, but it seems like the money bet.

  13. Tax Lawyer

    Okay, I’ll bite this apple/invitation from:
    >>>>>
    Okay tj, listening is the first step toward understanding. Your statement that “Can someone explain to me how that will create jobs for those underemployed folks in the charts above?” is actually not too difficult to answer.
    First, it is clear that supply-side concept of “give the rich a tax break, and they will re-invest that money into new businesses, which will provide jobs to the unemployed folks” approach has been a complete fraud, dud and non-starter. The wealthy take those same tax cuts, and either buy existing shares being traded, thus pushing up the market indices, they buy real estate with the hope that more speculation will take the property off of their hands, or they invest in companies who employ a foreign workforce. In any event, these profits are almost never put to use in building a small business. So the first step toward understanding is to realize that rewarding speculation does nothing to employ real workers.
    Second step–if the private sector cannot find an answer to this problem given its structural defects, then we must look elsewhere to find an example where these unemployed people are actually permitted to perform services that add value to GDP.
    The answer is both obvious, and “hidden in plain sight” since it is political dynamite at the moment, although it will eventually be the dominant philosophy for the 21st century. Either these people never get hired and they permanently lead to stagnating GDP, or someone hires them and their efforts get added to GDP. It is that simple (akin to moron Ben Stein’s comment that something that cannot continue forever, wont).
    So the government must use its increased tax revenues from the enhanced tax collections from the $200K plus crowd, to plug the output gap by employing those same detached job-seekers. So THAT is how raising taxes on the wealthy leads to net beneficiary/job-seeking employment.
    To illustrate this in more concrete terms, I am advocating good, old-fashioned redistribution policies aimed at achieving maximum output. If that requires a new WPA, then so be it. Where do people think our great universities, national parks and other historic common property originated?
    I

  14. rayllove

    The crash of the ag sector in 1921 put 40% of the population in a downward spiral that devastated rural America until WW2. By 1929 those who relied directly on ag production were down to 25% of the population but the poverty caused just in this sector alone, which was excluded from the unemployment statistics, was worse than all of the poverty combined related to that which was caused by the the recent downturn(by %).
    Plus, before the crash of 1929, 71% of the population was already living below what the BLS considered to be poverty conditions. Before the recent downturn the poverty number was 13.3% and it rose about one percentage point of late. What percentage of the ag sector population was reduced into poverty during the Great Depression is not known but it was most certainly above the 4% of to total population needed to be more than that poverty which has been caused recently, and, the poverty that occurred prior to the addition of the safety net provisions was most definitely much more severe than most of that which exists currently. In other words, it is hyperbolic to define what is occurring now, whether comparing unemployment or poverty rates, to that which came as a result of The Great Depression. The post doesn’t make that comparison exactly perhaps, but it does come pretty close to it by implication.
    Global poverty though… is a different story. A fact that is not mentioned enough in this country, is that if China’s success on poverty reduction is removed from the global equation, global poverty is getting worse in percentage terms, and, even with the inclusion of China’s success, poverty is rising in nominal terms, even though the World Bank standards for poverty are dubious (the standards are made questionable by the rise in malnutrition and access to safe drinking water. Counting those who are malnourished, and ill from water-related diseases, as being above poverty is at least ‘dubious’).
    So, the feudal few are still leaving devastation in their wake… but not so much in the ‘advanced nations’, unless of course their devastation is extended out to include our oceans. But that is a different story. It is worth saying though that the number of ‘dead-zones’ rose from fewer than 100 in 2003 to over 400 in 2008. And the cause of many of these dead-zones is poverty related, or, what might be best described as an unintended consequence of the ‘demographic dividend’.
    Ray

  15. Ricardo

    Why the surprise? I own the company and the government institutes policies that hurt my profitability. Am I going to lay myself off? If I did what would happen to the company?
    Why is anyone surprised that the lowest income people take the brunt of government economic mistakes? That is always the case.
    It is just like war. The politicians send the poor to do the fighting for them. What’s the big deal.
    So if taxes are raised on the rich who will pay? No questions. As always it is the poor who pay.

  16. J D

    I am always amazed at the pure advocacy of theft from one person’s income they earned to provide to another. Ever notice that socialism is for the people and not the socalist?……Yeah, I bet you didn’t. Raising taxes has and will never increase your revenue base. Let’s put up a comparitve graph on the growth of states who have state income tax over those that do not over a 50 year comparison. Also take a look at those states that have passed an income tax revenue over the previous years versus their estimates.
    As for the poor and income redstribution, since 1964 we have spent $8–10 trillion on antipoverty programs. The conclusion is virtually inescapable: if the availability of nearly an unlimited amount of money and the determination of countless government bureaucracies were the necessary and sufficient conditions to eliminate poverty, then by 2010 we should not still have more than 12 percent of the U.S. population—nearly 37 million people—in poverty compared to 13 percent in 1968.
    From the moment the Great Society conceived of the War on Poverty, it was a bad idea to believe that we could eliminate poverty by allowing a government bureaucracy to distribute massive amounts of public money to the poor. In the antipoverty efforts of the last four decades, we have witnessed one of the largest income redistributions from the taxpayers to the poor that the world has ever seen. Still, we have not eliminated poverty. Why should we believe that continued or expanded, new, and “improved” government programs, spending more trillions of dollars, will ever achieve more?

  17. Rebecca Burlingame

    Ray,
    Before the last recession, that difference in poverty for the U.S. and the rest of the world was a big issue for me: how is it fair to complain here when it is so much worse elsewhere? And yet I feel that this poverty – while it is not the same – is nonetheless related. Is it possible to bring back economic access to people here…if not, how can it happen elsewhere? I believe the answers for that have to happen in the developed world first, and that what can help the lower classes here, can help elsewhere.

  18. Stelios Theoharidis

    I am so tired of this trickle down trolling. TJ out of state spending accounts for less than %1 (0.63%) of California welfare spending or 10.8 billion during the period covered – 3.5 years. Compared to the corporate fraud and tax evasion that occurs on a regular basis in this country that isn’t that bad really.
    Extra money that wealthy people has doesn’t necessarily create jobs or go into the productive economy. How many times does trickle down economics have to be discredited. You want to see spending get money into the hands of people that have a higher marginal propensity to consume. Want to see more speculative behavior and asset bubbles put more money into the hands of the wealthy.
    But, frankly I don’t want to see too much more consumption in this country as it has become the pathway towards a bloated and ignorant populace, so we could certainly take stimulus money and put it into energy and resource efficiency. That would have an impact in multiples, it would employ people in the efficiency projects and it would save companies and government organizations money. Net reduction in energy use would then reduce demand and cut energy costs and externalities.

  19. beezer

    JD. Maybe we should concentrate on what dynamics cause poverty. Do you think the redistribution you so oppose is causing poverty? Of course not, because there was poverty before the programs, right?
    That the programs have not been able to eliminate proverty, may mean that the dynamics that create poverty simply are creating poverty faster than the government programs can eliminate poverty.
    So let’s ask ourselves a simple question. What creates poverty in America? If we focus on identifying those dynamics, we’ll probably save ourselves some money and a whole lot of aggravation.

  20. Adam

    The supply-siders questioning whether taxing the rich would raise incomes for others generally forget that, at least in our tax code, high marginal tax rates mean the “investor class” must invest in better plant, equipment, and labor, or have that money taxed away. That is all independent of any government expenditure. This is the basis of Larry Beinhart’s piece “Why the Economy Grows Like Crazy Amid High Taxes” (see http://www.alternet.org/economy/106979)
    The actual historical record is that incomes generally grew most when tax rates were high, see particularly the graph here: http://krugman.blogs.nytimes.com/2010/05/22/down-the-memory-hole/
    But perhaps our consume-ative brethren (what on earth are they conserving?) would rather forget this rather inconvenient truth…

  21. rayllove

    Rebecca,
    It can happen elsewhere the same way progress was made here and in most all developed nations. Development starts with agriculture. The ag subsidies though, not just those in the US but all ag subsidies combined, have made it less than cost effective for nations to develop their infrastructures.
    The ‘business friendly’ schemes used by developed nations have also made resource utilization less than efficient in the very countries where efficiency is most needed. The global net flows are not vastly benefiting the wealthy nations as the result of the result of any merit or by some sort of accident of fate. There are tariff escalation schemes and jingoistic manipulations of governments and etc.
    So it is quite so simple as just helping the poor in the US first.

  22. rayllove

    Rebecca,
    (our cat was in one his passionate moods as I wrote this comment so this is a rewrite. sorry.)
    Progress can happen elsewhere around the world the same way progress was made here and in most all developed nations. Development starts with agriculture. The ag subsidies though, not just those in the US but all ag subsidies combined, have made it less than cost effective for nations to develop their infrastructures.
    The ‘business friendly’ schemes used by developed nations have also made resource utilization less than efficient in the very countries where efficiency is most needed.
    The global net flows are not vastly benefiting the wealthy nations as the the result of any exceptional merit, or by some sort of accident of fate. There are tariff escalation schemes and jingoistic manipulations of governments and etc.
    So it is not quite so simple as just helping the poor in the US first.

  23. tj

    I listened and this is what I heard -
    In order to reduce the unemployment that results from the disincentives of government redistribution programs, we should raise taxes in order to provide larger government redistribution programs.
    I have at least 2 criticisms of the grand plan to raise taxes on the rich and let government spend it on employment boosting projects.
    1. Government cannot be trusted to responsibly spend on employment boosting projects.
    2. How does tax and spend remove the disincentives faced by the high unemployment/low income folks in the charts above? It does not matter if a job is created by stimulus or private ingenuity, the disincentive remains.

  24. 2slugbaits

    tj Your two criticisms are without merit. First, the problem is weak aggregate demand, not irresponsible government spending. It would be great if the govt spent money on worthwhile projects…unfortunately the GOP squawked a lot and those projects were cut from the original stimulus bill. But at this point even inefficient and irresponsible spending is better than no spending. You’re trapped into thinking that this is a supply side problem. It’s not; the problem is weak aggregate demand. Your second crticism is basically a poorly disguised whine that unemployed workers are lazy and therefore undeserving of any help. Why bother if they won’t work anyway. Well, think about it for one minute. If the government decides to spend some money on an infrastructure project and lazy workers decide that they would rather sit around all day collecting unemployment, then guess what…that infrastructure project won’t get built. In other words, execution of the project guarantees that people will choose work over unemployment. And then again you might want to reevaluate your income effect/substitution effect elasticities. What I think I’m hearing from you is a kind of envy of the unemployed. So do you agree with the WSJ that unemployed workers are “lucky ducks”? Judging by some of your comments you seem to have an exceptionally high disutility of work curve. Not everyone hates to work as much as you apparently do. Finally, unemployment compensation does have a disincentive effect, but that effect is trivial (and also irrelevant) when the central problem is a cyclical recession. And if people remain unemployed for too long, then they become unemployable for the rest of their lives. So get with the program and demand new government infrastructure projects.

  25. 2slugbaits

    W.C. Varones
    Ah, more naive leftism, blind to the incentive effect that marginal tax rates have on business formation and employment.
    Ah, another conservative who can’t do math. Take any corporate tax rate. Allow businesses to deduct interest payments. Now double that corporate tax rate. What’s the effect on the amount of physical capital investment? Answer: none. The only thing that effects the level of investment is the depreciation rate and expected inflation rate.
    If we only have smart enough Keynesians telling everybody what to do
    If only Keynes had enough critics who actually bothered to read the General Theory.
    How’d that work out for the Soviet Union?
    If you think the Soviet Union followed Keynesian policies, then you should have taken an econ class in Soviet economics before the USSR collapsed. Fortunately I did take a class on it, so I’ll fill you in. Soviets economics was all about a Leontief Input-Output production function with fixed ratios; i.e., the elasticity of substitution was zero. All this was informed by a labor theory of value (LTV). The Soviets completely rejected the kind of marginal theory of value held by Keynes. But do you know whose economic views did coincide with a Leontief Input-Output view of how value is created? Go on, guess. It was none other than Comrade Ronald Reagan. Reagan vehemently disagreed with Soviet political ideology, but the economics he learned at Eureka College was very much in the LVT and Leontief traditions. Reagan did not believe in the marginal theory of value.

  26. tj

    2slugs,
    Regarding weak aggregate demand – do you not see the folly in your stimulus arguement? Think Cash for Clunkers, but on a larger scale. A temporary increase in government spending provides a temporary increase in AD.
    However, in this case we are talking about a permament tax increase. I am sure you know how that works. The affected will make a permanent adjustment to their consumption/saving profile. In this case, less spending and less saving. So the tax increase creates an initial negative hit to AD, then a long run reduction in AD through less saving and investment.
    Of course, when government transfers that tax increase to keep local and state pension funds solvent then union bosses can sleep well knowing they have once again fleeced the taxpayer.
    I am still not sure how transferring income from those making $200k or more to state and local pension funds (or insert you favorite progressive special interest here) will remove the disincentive for the high unemployment/low income folks to take a job, lose unemployment benefits, lose child care tax credits, earned income tax credits, begin paying payroll taxes, etc, (but not begin paying income tax as you’ve got to move quite a ways up the income ladder to begin paying income taxes).
    Remember, those at the lowest income levels are less skilled on average, so they are not going to jump into a high paying job created by your AD stimulus. No matter what kind of stimulus plan you want to introduce, the opportunity cost of moving from unemployment to employment is too high for that group.

  27. Buzzcut

    I don’t dispute Menzie’s data, I dispute his interpretation of the data.
    I did some regressions awhile back of Census data. They had household income data broken down by number of income earners, educational attainment, and working hours.
    Needless to say, regressing household income by those controls pretty much explained all the variation in the data. Higher income households worked more, had higher education, and had more income earners per household.
    In fact, what shocked me most was that the median number of income earners for the lowest quintile of household income was… zero. There were no income earners.
    So, should it shock anyone that, in a recession, unemployment increases most among those with the least education and who work the least in the first place?

  28. John Smith

    This data is severely screwed up and hence meaningless. If you’re earning >150K then you’re smart enough to find a job. You have already proved you can find a job over 150K. It’s a self-selected group of the most able. So who is most likely to be able to find or create a new job for themselves – a smart, quick-witted, adaptable person who has already been able to earn >150K, or Jose the pool guy with six kids and a dumpy wife?

  29. rayllove

    John,
    Unless of course artificial wealth created the illusion that some of the demand for those earning over 150k was also artificial.
    And when so many of these artificially supported ‘able’ folks are forced to care for their pools while they wait for the inevitable foreclosure, Jose simply finds some other useful occupation. One of those occupations that have been in demand since the ancient times most likely.
    Of course Mr. Able could find a lessor paying job, but those tiers of the job market are subject to the same dynamics of oversupply as before. And being overqualified for a job does not necessarily mean that a person is better at that job than some less educated person who has more related experience. So, what is Mr. Able to do?

  30. fred schumacher

    Re: “The crash of the ag sector in 1921 put 40% of the population in a downward spiral that devastated rural America until WW2.”
    Hallelujah. Someone who pays attention to the forgotten population.
    In 1921, half the U.S. population was rural and 27% were farming, the largest employment category back then. In rural America, the Great Depression started 8 years earlier than it did in the cities.
    All that speculative bubble in the 1920s did nothing for rural America. It did not build the economy for half of Americans. There was no trickle down.
    Rural America did not recover until the war years, when massive federal deficit spending created the demand to drive up grain prices. In North Dakota we joke that there were three great crop years: 1918, 1942, and next year.
    A lot of those unemployed rural young men in the Depression ended up working for the CCC, probably the single most important initiative that stopped a revolution in the U.S. Three squares a day and a roof over your head goes a long way to calming anger.
    I think the best thing now would be to allow the Bush tax cuts to expire, as was intended, and use the extra federal income to subsidize state and local governments, which are hemorrhaging essential employees because of short funds. That will put money directly back into the economy and increase demand for goods and services.

  31. tj

    Fred,
    While I sympathize with government employees who will lose there job, I can’t agree with your suggestion.
    The reason is that if progessives have their way, your tax increases would simply be transferred to ridiculous union pensions, redundant union positions, and other progressive special interests.
    Why should the entire taxpaying population donate a larger fraction of their income to further such folly?
    All we need to do is reduce government union wages and benefits, and push union pension benefits further into the future (eg retire at 67 instead of 50). In other words, apply the same changes to public pensions as will be applied to private retirement accounts.
    If we do that, we can avoid the tax increases you suggest.
    Put the country on a trajectory toward a balanced budget by cutting spending and making tax collection more efficient by simplifying the tax code for households and firms.

  32. John

    As one who works with those in poverty and their children, we need to understand that at least in Minnesota, the welfare is so good that it discourages folks from getting a job. Those on welfare have cell phones, not just one, they can send their child to a private school, and they are mostly over weight. We tutor their children two nights a week because the parents don’t value education and don’t know how to parent. They grew up with parents or more likely just a mom who lived on welfare and was probably on drugs so she could not really be a mother who could teach her children the basic life skills we all learned at home. Increasing gov’t welfare has helped destroy the poor family and created this problem. A terrible unintended result! We need to focus more on helping people become less dependent on the gov’t and not more! This won’t be easy.

  33. dp

    Why isn’t the threshold for being “wealthy” at $100,000, instead of $250,000? At $100,000, there’s no unsatisfied consumer need which, in my opinion, is “wealthy?” Any ideas?

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