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Thursday, February 01, 2007

CBO: Economic Volatility

Recently, questions have been raised about research findings indicating that economic volatility has increased in recent years causing an increase in economic insecurity. Yesterday, the Congressional Budget Office issued a report examining this issue. This is the summary of the report and corresponding testimony from Peter Orszag, Director of the Congressional Budget Office.

Though the evidence could be stronger and more research will be helpful, the CBO concludes that "variability in ... earnings and income ... may now be much higher than in the past—perhaps contributing to anxiety among workers and families":

My testimony today makes four main points:

  • First, macroeconomic volatility—the ups and downs of overall economic growth and inflation—has declined and is now relatively low. In particular, year-to-year fluctuations in the economy have become smaller than in the past.

  • Second, despite the relatively modest volatility in the overall economy, workers and households still experience substantial variability in their earnings and income from year to year. CBO’s analysis shows, for example, that between 2001 and 2002, one in four workers saw his or her earnings increase by at least 25 percent, while one in five saw his or her earnings decline by at least 25 percent.

    Some of that variability stems from voluntary actions, such as a decision to stay home and rear children, and some stems from involuntary events, such as the loss of a job. Earnings volatility is somewhat higher for people with less education.

  • Third, although earnings and income volatility is substantial, more research is required to determine how and when that variability has changed over the past few decades. The evidence that exists suggests that earnings have tended to fluctuate more, on a percentage basis, over the past 25 years than they did during the 1970s. The number of studies on the topic is limited, however, so it is too early to reach firm conclusions about the precise timing or magnitude of any increase. Given their importance, trends in income volatility seem to warrant significant research attention.

  • Finally, while the unemployment rate has been relatively low in recent years, the adverse consequences of losing one’s job appear to have increased. In particular, a higher fraction of unemployed workers remain unemployed for very long periods, and the average reduction in earnings once they are reemployed appears to have grown.

The report concludes with:

The U.S. economy has become less volatile: Macroeconomic fluctuations are now much milder than they were in the past. At the same time, however, households continue to experience substantial variability in their earnings and income, and that variability may now be much higher than in the past—perhaps contributing to anxiety among workers and families. The topic seems worthy of more attention from both policymakers and analysts.

    Posted by on Thursday, February 1, 2007 at 03:24 PM in Economics | Permalink  TrackBack (0)  Comments (8)


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