Annual Report 2020 | Federal Reserve Bank of St. Louis
Economists study individual earnings groups because, as one might expect, changes in the economy have different effects on households, depending on their income and wealth. The COVID-19 pandemic had disproportionate effects on certain earnings groups in 2020, and in some cases these effects were severe.
A portion of our research on this topic, outlined here, looks at households’ different experiences with unemployment, reduced work hours and the ability to respond to financial stress.
The figure below shows differences in unemployment (Panel A), with three important findings:
SOURCES: IPUMS CPS data and authors' calculations.
NOTES: “Q” refers to quintile, from lowest earnings (Q1) to highest earnings (Q5). Panel A shows that the lowest earners (those in Q1 and Q2) saw a significant spike in unemployment in April 2020. Panel B shows that lower earners also experienced greater losses in hours worked, with nearly 15% of those in Q1 losing at least 25% of their working hours in April.
Even among workers still employed during the pandemic, those with lower earnings experienced a larger drop in working hours. Panel B in the figure above plots the percentage of employed workers in each earnings group who reported working less than 75% of their usual hours: for example, those who usually work 40 hours per week, but who worked less than 30 hours. Although the percentage of workers with reduced hours was similar across earnings groups prior to the crisis, lower earnings groups lost much more once the pandemic began.
These findings are especially alarming since low-income households tend to run deficits, meaning their spending exceeds their incomes. In addition, they have less or even no savings to fall back on once they encounter a financial hardship.
The Federal Reserve Board of Governors 2016 Survey of Consumer Finances (SCF) provides supporting evidence of this dynamic. About 15% of households ran income deficits in 2016. For the remaining 85%, the survey asked how they would respond to a financial emergency, given the following options:
The figure below shows each earnings group’s responses to financial strains—the share who resorted to income deficits for actual financial strains (green bar with dashed lines) and the shares who chose other survey responses for hypothetical financial emergencies. Clearly, high-income groups are much less likely to run a deficit: The fraction of top-quintile households with income deficits was just 7.9%, compared with 24.6% of households in the bottom quintile. In addition, in response to a financial emergency, only 24.7% of households in the bottom quintile would opt to use savings to maintain spending, while 75.6% of those in the top quintile would do so.
SOURCES: Federal Reserve Board's 2016 Survey of Consumer Finances and authors' calculations.
NOTES: “Q” refers to quintile, from lowest earnings (Q1) to highest earnings (Q5). The chart suggests that higher-income earners (those in Q4 and Q5) entered the COVID-19 crisis better able to weather financial strains. In the 2016 SCF, a significant percentage of both higher-income quintiles reported that in a financial emergency, they would fall back on personal savings (62.4% and 75.6%, respectively). In contrast, those in the lowest earnings groups (Q1 and Q2) would rely on borrowing (28.5% and 22.9%, respectively) and postponing payments (13.5% for both quintiles) more than all other earnings groups.
In summary, households with lower earnings were disproportionately affected by the COVID-19 crisis in 2020. They experienced higher unemployment rates and reduced working hours. Based on 2016 survey data, they also likely entered the crisis more financially vulnerable, with less or no savings to hedge against unexpected income declines caused by the pandemic.
Aaron Amburgey and Julie Bennett, both research associates at the St. Louis Fed, contributed to this article.