Costs Rising, Income Falling

New Study Shows Americans' Financial Slack Is Decreasing

Costs Rising, Income Falling
June 29, 2016

Where's the wage growth in America? Economists have been asking that question throughout our frustrating and slow recovery from the Great Recession. Unfortunately, while wage growth is scant, growth in costs is not.

The combination of lower wages and rising expenses is putting more Americans in a financial bind than ever before — especially at the lower end of the economic scale. A recent study by the Pew Charitable Trusts confirms that analysis.

The Pew study looked at the majority of the working-age population, by their definition those between the ages of twenty and sixty, and analyzed the collective expenses with respect to income levels (the expenditure-to-income ratio). The Great Recession took a huge toll on median incomes, and expenditures followed suit out of necessity. Since that time, necessary expenses have recovered to pre-recession levels but income has not, thus the expenditure-to-income ratio is rising. The median ratio was 71% in 1996; by 2014, it had reached 75%.

Not only has median income not recovered since the financial crisis, it has contracted. Compared to the pre-crisis year of 2004, median expenditures rose by almost 14% by 2014 while median income dropped by almost the same amount. This has had a devastating effect on lower-income families who must spend a higher percentage of their income on necessities.

To illustrate the effect, Pew broke down the analysis into upper, middle, and lower thirds of income level. In all three segments, the median income remaining after expenses (aka financial slack) dropped significantly, but the upper third of incomes had enough slack to handle the recession easily — even after the recession, their median slack was just over $33,000. Those in the middle third of incomes were approaching the breakeven point with their slack dropping from $17,164 in 2004 to $5,944 in 2014, and in the lower third of incomes, the median slack went negative. The median income remaining after expenses for the lower third of incomes was $1,417 in 2004; in 2014, it fell to -$2,339.

In essence, that means more Americans experienced a decline in savings, and likely greater debt and greater use of credit. We are already heavily indebted — in 2015, the average household debt in the U.S. was over $130,000, with $15,762 of it on credit cards. Trends suggest that this debt will continue to rise.

Lower-income families are taking a hit from all sources of expenses. Pew found that the housing costs of lower-income households grew by over 50% between 1996 and 2014. Poorer families are typically spending 40% of their income on housing as compared to the 25% for middle incomes and 17% for upper incomes. Transportation costs took up 15.7% of the income of families in the lower third, compared to 11.2% for the middle, and 8.2% for the upper third. The median gas costs in the lower third of incomes was $2,095 in 2014, which is more than their median collective transportation costs (including public transportation, auto insurance, and vehicle maintenance and repair) in 1996.

The situation may be even worse than the study implies — since pre-tax income is used as the baseline, taxes could be cutting even further into the financial slack.

At least lower-income families are trying to adapt without breaking the bank. Pew found that Americans in the lower third of incomes spent considerably less on food and entertainment in 2014; a little under $5,000 compared to $6,480 in the middle third of incomes and $9,760 for the wealthiest third.

Americans are resourceful, but the Pew study suggests that our resourcefulness at the lower end of the income spectrum is being stretched to the limit. We need strong economic growth to raise wages and rebuild financial slack for lower-income Americans.

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Erin | 06.29.16 @ 18:44
And yet, according to some, those people who are facing tough decisions in their lives just need to work harder...put a little more effort in. Something needs to change soon or it's just going to be rich and poor and the middle class will be wiped out.
Brittany | 06.29.16 @ 18:44
I've been trying my hardest, over the summer to put as much away in savings as possible because autumn is always the hardest few months for me.
Carla | 06.29.16 @ 18:47
As much as we try to save, life keeps throwing us a curveball. We are trying to put back as much as we can but it isn't easy.
Nancy | 06.29.16 @ 18:48
I feel this one. I'm currently making about half of what I made 5 years ago. It's rough out there.
Chrisitna | 06.29.16 @ 18:53
I work three jobs, and my husband works one, and due to one thing happening after another, we still aren't able to save. I feel like I'm in the negative after expenses :(
Elaine | 06.29.16 @ 18:54
Would love to put some away for such occasions. However, in the middle of looking for a job.
Kamie | 06.29.16 @ 19:03
Being that of the lower income, I can say that I have reached my limit on making the dollar stretch.
Beverly | 06.29.16 @ 19:04
But I thought we were told everything was great, unemployment is down and the jobs are plentiful!! Yeah, if you want part time work for less money. Costs rose, yet people had to take pay cuts.....that's not my idea of things being great.
$commenter.renderDisplayableName() | 11.28.20 @ 14:25