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Income Volatility

posted by Katie Porter

A relatively new book, The Great Risk Shift, by Yale political scientist Jacob Hacker, may be of interest to CreditSlips readers. Hacker's principal finding is that on average Americans have a 17% chance of seeing their family income drop by more than half from one year to the next year, and that this income volatility risk is substantially higher than in the 1970s. This research ties in nicely with the findings of Warren, Westbrook & Sullivan in Fragile Middle Class about how the income aspects of job problems, medical problems, and family break-up contribute to the financial distress of families in bankruptcy. It also aligns with the recent piece, The Failure of Bankruptcy's Fresh Start, that Debb Thorne and I authored about how income volatility continues to plague families even after bankruptcy.

Illustrating the adage that where you stand depends on where you sit, the Economist had a story about a month ago (subscription required or use Lexis to retrieve it) that dismissed the consequences of the increasing income volatility that Americans face. The article critiques The Great Risk Shift and argues that Americans are coping fine with rising income instability. The Economist points to plunging savings rates as evidence that Americans aren't worried about income shortages and notes that home equity remains a safety net for families (Of course, this latter protection only applies to the 65% of families that own a home and only those who have equity in their homes--an increasingly scarce commodity).

Any thoughts on The Great Risk Shift by those who have read it? Were you convinced by Hacker's evidence? Apparently, he relies significantly on the rising bankruptcy rate as evidence of the problems created by income volatility. What about The Economist's take on Hacker's work? Are there any positive sides to income instability?


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