Exclusive Commentary

The Labor Market Impacts of the Great Recession of 2007-2009 on Workers Across Income Groups, By Andrew Sum, Professor of Economics and Director of the Center for Labor Market Studies, Northeastern University

- Posted April 12, 2010


The national recession of 2007-2009 has taken a very substantial toll on American workers. From the final quarter of 2007 through the last quarter of 2009, the number of employed civilians 16 and over declined by more than 8 million; the number of unemployed more than doubled, as did the number of the employed working part-time for economic reasons (the “underemployed”); and a growing number of persons who wanted work but could not find it withdrew from active labor force participation (the so-called “labor force reserve”). In the fourth quarter of 2009, nearly 28.9 million persons, or 18.2 percent of all U.S. workers, were unemployed, underemployed, or a member of the labor force reserve, the highest such ratio since the beginning quarter of 1983.

But it’s important to recognize that this problem did not affect everyone equally.

Job losses were far higher among men (7.6 percent) than women (3.2 percent), especially among Black males (10 percent); among younger workers under 30 than older workers over 55, whose employment levels did not diminish; among the less educated (especially males without high school diplomas) than among the college educated; and among blue collar workers (employment down one-sixth) than professional workers (employment increased by 2 percent).

Despite many years spent researching U.S. and state labor markets, we found the size of the gaps in job losses and labor underutilization rates at the end of 2009 to be astounding.

To identify the labor market underutilization rates of workers in different household income groups, we assigned each worker to the decile (tenth) of the household income distribution most closely corresponding to their household’s reported gross income in the twelve months immediately prior to the Census Bureau’s 2009 Community Population Survey (CPS) interviews.

The bottom decile consists of those workers with household incomes below $12,500, while the top decile had annual incomes above $150,000. We estimate that nearly all workers (including the unemployed and labor force reserve) in the bottom decile would have been classified by the U.S. Census Bureau as poor or near poor, and 100 percent would have been categorized as low income (under 200 percent of the poverty line). In the second decile, 65 percent would have been classified as poor or near poor.

The unemployment rates of U.S. workers in the fourth quarter of calendar year 2009 varied extremely widely across the ten household income deciles—and low-income workers were unquestionably hit hardest. Workers in the lowest income group faced a Great Depression era unemployment rate of nearly 31 percent, while those in the second-lowest income decile had an unemployment rate slightly below 20 percent (Table 1).

Unemployment rates of workers fell steadily and steeply as their household income improved. Workers in the top two deciles of the income distribution faced unemployment rates of only 4.0 and 3.2 percent, respectively. These are the equivalent of full employment conditions. The relative size of the gap in unemployment rates between workers in the bottom and top income deciles of the nation was close to ten to one at the end of 2009.

Table 1:
Unemployment Rates and Underemployment Rates of Workers in the U.S. by Decile of the Household Income Distribution in the Fourth Quarter of 2009
(in Percent)

Decile

(A)

Unemployment
Rate

(B)

Underemployment
Rate(1)

Lowest

30.8

20.7

Second

19.1

17.2

Third

15.3

12.7

Fourth

12.2

8.3

Fifth

9.0

6.1

Sixth

7.8

5.4

Seventh

6.4

4.4

Eighth

5.0

3.6

Ninth

4.0

2.5

Top

3.2

1.6

Note:

(1) The underemployment rate is calculated by dividing the number of underemployed by the employed.

(2) The adjusted labor force is the sum of the members of the civilian labor force plus the labor force reserve.

The incidence of underemployment problems among workers also varied to a very substantial degree across household income deciles in the fourth quarter of 2009. The underemployed were frequently young, less educated workers in lower-level service-, sales-, and laborer-type positions, and were far more likely to live in low- and lower middle-income households than in affluent families. Employed workers in the lowest-income households faced an underemployment rate of nearly 21 percent. More than one of every five workers in this income group was working part-time for economic reasons in the fourth quarter of 2009.

The average underemployed worker only obtained 22-23 hours of work versus a mean of nearly 43 hours for their full-time employed peers. The incidence of these underemployment problems also fell steadily and considerably as we move up the income distribution, dropping to 6.1 percent for those in the fifth decile to 3.6 percent in the eighth decile to a low of only 1.6 percent for those workers in the top decile of the income distribution. Employed workers in the lowest income decile were 13 times as likely to be underemployed as workers in the top decile of the nation’s income distribution in the fourth quarter of 2009.

Our third labor market problem group consists of members of the labor force reserve, oroverhang.” These are individuals who were not actively participating in the labor force but who expressed a desire for immediate employment. For workers in each decile of the household income distribution at the time of the CPS household surveys, we divided the estimated number of persons in the labor force reserve by the adjusted civilian labor force. (See note 2).

The incidence of experiencing one of these labor force reserve problems (a type of hidden unemployment) was highest by far at the lower ends of the household income distribution. Nearly 1 of 10 members of the adjusted labor force with incomes in the bottom decile of the distribution were part of the labor force reserve, versus only 5 of 100 among those in the third lowest decile, only 2 of 100 among those in the seventh decile, and only 1.5 of every 100 among those in the top two deciles.

The incidence of these so-called hidden unemployment problems was seven times higher among those in the bottom decile than among those in the top decile. Potential workers in the lower income groups were the most likely to have either withdrawn from active labor force participation or chosen not to enter the depressed labor market of late 2009 in search of paid work.

The estimated sizes of the unemployed, underemployed, and labor force reserve groups can be combined to estimate the overall labor underutilization rates for workers in each of the household income deciles. The range in these labor underutilization ratios across income deciles is extremely wide (Chart 1). The underutilization rate for workers in the lowest decile was slightly over 50 percent and remained quite high at just under 38 percent for those in the second lowest decile. Workers in the two deciles in the middle of the distribution (the fifth and sixth deciles) faced underutilization rates of 15 to 17 percent, representative of a severe recession. In substantial contrast, workers in the top two income deciles encountered underutilization rates of only 6 to 8 percent. The underutilization rate of workers in the lowest decile of the income distribution was more than 8 times higher than that of workers in the top decile. Gaps in these labor underutilization rates between the least and most affluent workers have widened sharply over the past two years. Between the fourth quarter of 2007 (before the recession began) and the fourth quarter of 2009, the underutilization rate of those in the bottom decile rose by 16.5 percentage points versus a gain of only 2.5 percentage points for those at the top.

Chart 1:
Underutilization Rates of Workers in the U.S. by Selected Deciles of the Household Income Distribution in the Fourth quarter of 2009 (in Percent)



At the end of calendar year 2009, as the national economy was beginning to recover from the deep recession of 2007-2009, workers in different segments of the income distribution clearly found themselves facing radically different labor market conditions. A true labor market depression faced workers in the bottom two deciles of the household income distribution. A deep labor market recession prevailed among those in the middle of the income distribution, especially among blue collar working class families, and close to a full employment labor market environment prevailed at the top of the income distribution.

What this shows is that while this has been a tough time for everyone, we can’t ignore how truly hard things have been for low-income Americans. What has been a recession for our nation as a whole has truly been a depression for those most in need.

Andrew Sum is a Professor of Economics and is Director of the Center for Labor Market Studies at Northeastern University. Ishwar Khatiwada of the Center for Labor Market Studies helped in the writing of this report.