Association for Public Policy Analysis & Management

Problems of income and work hour volatility are gaining attention alongside existing concerns with wealth and income inequality, but a comprehensive picture is missing. This paper uses nationally-representative household data to map distributions of wealth and income and their overlap with income volatility and exposure to income downturns. We provide a national picture, as well as a view of how these disparities and vulnerabilities vary with race and ethnicity (Hardy and Ziliak, 2014 and Tippett, et al, 2014).

The picture clarifies that not all income volatility is the same. The swings of investment income accrued by high-worth individuals, for example, can be buffered by ample stocks of wealth. But income volatility for low income/low wealth workers, to cite a very different example, tends not to be well-buffered and can lead to costly coping strategies. 

The paper uses the Federal Reserve Survey of Household Economics and Decision Making (SHED) and the Panel Study of Income Dynamics (PSID) to analyze the role of race and the incidence of income and work volatility across low, moderate and high wealth families.  The SHED focuses on month-to-month volatility while the PSID reveals year-to-year income swings. We stratify across wealth and income, and examine the role of race and determinants of income volatility as well as associated economic vulnerabilities. 

Our initial analysis of the SHED provides six insights:

a)      Income volatility is widely felt but disproportionately experienced by lower income households. Nearly 3 in 4 of people self-reporting notable month-to-month income variation earn less than $100,000 and about 40% earn less than $40,000.

b)      Those least likely to be equipped to manage income volatility - i.e., those most likely to face both low income and low wealth - tend to be black or Hispanic. About 3 in 10 of all SHED respondents are black or Hispanic, but 4 in 10 of households earning under $40,000 are black or Hispanic.

c)      Consistent with the finding above, black and Hispanic households are disproportionately likely to have low income and low wealth, and are also disproportionately likely to face high income volatility.

d)      Most households exposed to high levels of volatility report having weak cushions. About 3 out of 5 people reporting high levels of volatility say they are unable to meet 3 months of expenses with savings, borrowing, or other resources.

e)      Controlling for income and wealth, black and Hispanic households are not more likely to face high income volatility than others.

f)       Consistent with the findings above, coping ability varies strongly by race. For non-Hispanic white households facing volatility, 4 in 5 report being able to come up with $400 in an emergency. For black households facing volatility, just half report being able to come up with $400. For Hispanic households, 3 in 4 could.

These initial findings are extended and compared to results from the PSID.