If it was ever true that “a rising tide lifts all boats” in an economic sense, it is clearly not true in modern America. Since 1980 half of Americans have been stuck in place—their wages in real terms haven’t budged—while the top 20% have seen large gains.
Rising inequality of income and of wealth undermines much of the narrative about opportunity in America—that it’s a country where anyone can pull themselves up by their bootstraps. In fact, today the U.S. has a lower rate of intergenerational economic mobility than France, Germany, or even Sweden.
Another form of economic inequality has been rising as well. Though it’s garnered less attention, it undermines not just families’ dreams for their children but hopes for their own lifetimes. It’s the gap between people with financial stability and those without it.
Our research has found that even those with long-term, “steady” jobs cannot count on financial stabilitybecause of the volatility and unpredictability of their incomes and expenses. The major source of income volatility we found was due not to job changes, but to changing income from the same job. In other words, our households had steady jobs without steady pay.
Taken together, these two forms of inequality mean that some households have incomes that are the worst combination of stagnant (over decades) and volatile (on an annual and even a monthly basis).
One major source of the problem: a huge shift in risk from organizations to employees. Multiple studies have documented that firms have increasingly pushed the risk of business downturns (short-term or long-term) onto workers through labor-market innovations such as dynamic, variable schedules; increased services outsourcing; and the rise of contract work.
Progress requires employers to own up to their role in this shifting of risk, and to take steps to help workers manage risk better. And it’s not offering a financial skills course: There’s been substantial evidence for a quite a while that financial literacy programs don’t help. People facing wide monthly swings in income and expenses need more than better budgeting skills or financial literacy education. It’s nonsensical to blame people for “poor choices” or a lack of financial literacy when their volatile economic circumstances would challenge the skills of a finance MBA. For instance, people are often advised to put saving and bill-paying on auto-pilot so that they don’t miss due dates and saving becomes automatic. But that advice only makes sense when you have a predictable and stable income. When you experience large swings in income from month-to-month, “auto-pilot” is dangerous, especially when there’s little slack. Making credit card, mortgage, or rent payments in the same exact amount, at the same exact time each month is hard when everything else is unsteady. And when you don’t know if you’ll get enough hours at work to pay the electric bill this month, there’s little chance you’re going to open an IRA or a 529 plan or even set-up direct deposit into a savings account.