What factors influence the likelihood of filing New York bankruptcy? That’s not exactly the question the Federal Reserve Bank of Minneapolis, Minn., asked in its research on “income risk,” but it addresses the question in some ways. Economists often write about “income inequality,” but that’s just the distribution of income at any given time. Income risk focuses on the fluctuations that directly affect households: job losses, job gains, industry declines, pay raises, health emergencies, promotions, etc. Negative income risks regularly contribute to New York bankruptcy situations.
Although income risk is important to workers, it’s hard to measure. It isn’t easy to convince people to report their financial information to researchers over many years. It’s much easier to grab random data on a yearly basis, but that doesn’t say much. Using data from the Social Security Administration, which tracks tens of millions of Americans’ wage earnings, the author explored income risk to workers in recessions and over their lives. Here are some of the researcher’s findings.
First, the author discovered some unintuitive facts about income risk during recessions. Specifically, income risk does not change much in downturns. In fact, high-income workers suffer significant wage losses just as low-income workers do. However, fewer workers across the spectrum see significant positive swings in income, meaning recessions “skew” income risk downward for everyone. By contrast, when the economy is booming, low-income workers tend to see more positive swings in income, but the highest-paid workers’ earnings outpace even moderately high earners.
Second, the number one predictor of income loss due to a recession is a worker’s average earnings over the five-year period preceding the recession. Generally, low-income workers lose much of their earnings due to a recession, but surprisingly, the highest income workers lose even larger proportions of their incomes. The author cautions that she could not determine whether high-income workers lost non-wage compensation, such as bonuses and stock options. Of course, high-income workers probably have more in savings too, so they can weather a recession better than low-income workers do.
The author also compared the results from the U.S. data to other countries and found similar results. Additionally, though, she found that households with two earners did not necessarily make it through recessions better than sole-earning households. Moreover, government-provided insurance mechanisms help households more than simply having another earner does. The U.S. had a much less effective insurance system than the other advanced countries it was compared to.
Third, American workers’ incomes largely stay the same over time, which suggests that they are much more likely to experience large downward swings than would otherwise be predicted. This tendency grows as workers age. As they approach middle age, wages and opportunities for advancement start to plateau.
The author concludes that despite opportunities for borrowing and using social insurance the “welfare costs of the remaining fluctuations are very large, on the order of 25 percent to 40 percent of consumption per household per year.” In other words, when income swings affect households, they do so severely.
The Minneapolis Fed report is here.
Similar to the study finding that unemployment is a bigger cause of mortgage default than previously thought, it’s clear that Americans face substantial income risk over their working lives. The risk is often negative, which can create serious financial hardship.
If your household has substantial debt and a serious income loss is impairing your ability to pay your bills on time, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
