Nowhere is the risk shift of the last quarter century more apparent than in the widening swings in working families' incomes.
World War II era. Instead, a growing number of families have found themselves caught on a financial roller coaster ride, with their annual incomes taking increasingly wild leaps and plunges over time.
In the early 1970s, the inflation-adjusted incomes of most families in the middle of the economic spectrum bobbed up and down no more than about $6,500 a year, according to statistics generated by the Los Angeles Times in cooperation with researchers at several major universities. These days, those fluctuations have nearly doubled to as much as $13,500, the newspaper's analysis shows.
This growing volatility — and the rising risk it signals — has cut a wide swath. It has touched families from the working poor to those, like the Fredos, near the top of the earnings pyramid. The shifting of risk, in other words, is proving to be a democratic phenomenon.
The Times' analysis is based on the Panel Study of Income Dynamics, which is underwritten by the National Science Foundation and run by the University of Michigan. Unlike most economic measures, which involve taking snapshots of random samples of Americans at different times and comparing them, the panel study has followed the same 5,000 nationally representative families and their offshoots for nearly 40 years.
As such, it is the most comprehensive publicly available record of family earnings and income in the world — and it goes a long way toward explaining why, even in the midst of a recovery such as the one underway, so many Americans feel so uncertain about their economic circumstances.
In using income volatility to gauge risk, The Times is taking a page from the financial markets, where the chief measure of a stock's riskiness is how much its price bounces up and down compared with changes in a market measure such as the Standard & Poor's 500 index.
And just as with the stock market, there can be a big payoff.
Families in the economic middle saw their incomes, adjusted for inflation, climb by almost one-quarter to an average of nearly $50,000 between the early 1970s and the beginning of this decade, the newspaper's analysis shows. At the same time, middle-class families saw their average net worth grow 40% to $86,100 in the last decade alone, according to the Federal Reserve.
The rewards near the top of the economic heap have been even greater. The average income of families in the upper 10% of earners nearly doubled in the last generation to $130,400. Their average net worth nearly doubled as well, according to the Fed, to $833,000.
Free-market advocates cite these pocketbook advances as proof that the economy has been overhauled in the right way.
"On the whole, we have moved toward a freer market, a more competitive economy and a richer one," said University of Chicago economist and Nobel laureate Gary S. Becker. "There has been a shift toward people taking more risk on themselves and the economy has gained for it."
But there is another, less sanguine way to view what has unfolded.
The more that a family's income fluctuates, the greater the chance it will be caught in a downdraft when a crisis — such as a layoff, divorce or illness — strikes. Then, it can be extremely tough to bounce back.
Over the last three decades, working families have faced ever-changing — and, for the most part, increasingly more perilous — risk-reward bargains.
During the 1970s, families in the economic middle enjoyed a comparatively favorable run. Although their incomes generally swung up or down as much as 16% a year, they ended each year an average of 2% ahead of where they began. The result by the decade's close was that the reward of extra annual income had more than covered the potential loss from a single year's sudden plunge.
But the story during the 1980s and early 1990s was basically the reverse. The volatility of families' income nearly doubled to as much as 30% a year. But now, instead of growing amid all the ups and downs, average family income dropped at an annual rate of 0.3% in the 1980s and an even steeper 2.3% in the early '90s. The bottom line: more risk for less reward.
Although volatility remained high in the late 1990s, with typical annual swings of as much as 27%, incomes finally began to grow again, improving families' odds of being able to get ahead. But the good times didn't last. Since 2000, incomes have reversed course and fallen about 1% a year, according to recently released census figures. In other words, things are back to the unattractive equation of more risk for less reward.
A separate analysis by Hacker, the Yale political scientist, found even more dramatic changes in income swings. In a study published in May, Hacker and a colleague reported that income volatility among households in the University of Michigan database had more than doubled between 1973 and 1998. The pair concluded that at its peak in the mid-1990s, volatility was roughly five times greater than in the early 1970s.