Living Wages, How Do They Affect A Person's Sense of Economic Security? Examining a New Measure of Well-being

Written by Ade Samuel and Dr. Amy K. Glasmeier on 02/18/2019

Money may not buy happiness, but economic security is certainly a step towards it. A myriad of studies have investigated the link between economic standing and an individual’s holistic well-being. These studies provide empirical backing for an almost implicit understanding that security in finances plays an important role in determining a person’s quality of life (1, 2). A less complex, though similarly intriguing, avenue of investigation than that of the path to happiness is the current state of economic security within the US. A strong base of literature is developing on what economic security means, the factors that affect it, and how it has fluctuated over time. The expansion of knowledge with regards to these topics adds a layer of nuance to the understanding of individual economic experiences within the United States, and in turn sheds some light on an important aspect of the lives Americans lead across the country.

Social scientists are becoming increasingly interested in the concept of economic security. However, in order to adequately study it they must first effectively define it and develop quantitative metrics through which it can be measured. Researchers at the Federal Reserve Bank of San Francisco in conjunction with several other institutions sought to do just that and developed the Economic Security Index (ESI). This metric incorporates data from a variety of sources and builds on previous work concerning the study of economic security to give a more complete representation of its condition in the United States for a myriad of sub-groups. In the process of developing the ESI this team of researchers defined economic security based on two circumstances: the likelihood that a particular household experiences significant financial loss (greater than 25% of the previous year’s available income), and the capacity for that household to withstand such loss. This 25% threshold was asserted based on American National Election Survey (ANES) data, in which just under 50% of respondents claimed that 3 months without income in a given year would see them face financial hardship. After defining these circumstances the team identified measurable phenomena that affect them. These phenomena include the likelihood of large household income reductions, the possibility of significant medical-out-of –pocket (MOOP) spending, and a household’s capacity to withstand drastic financial shifts because of garnered wealth (3). The summation of income losses and unforeseen expenditures represent shifts in a household’s “available income”, while garnered wealth represents the primary means of buffering against these shifts. These phenomena were modeled mathematically and aggregated in a manner that yielded a share of individuals who experienced a 25% reduction of available household income from one year to the next without a sufficient financial safety net. This share of individuals within a particular sub-group is the value represented by the annual ESI.

The annual ESI has been calculated from 1985 to 2010 using two base data sources, and both calculations show that economic insecurity in the United States has increased over the observed time span. The number of Americans who suffered significant financial losses without the necessary wealth to buffer those losses stood at 14.3% of the population in 1986 and has risen by 5.9% accounting for more than 20% Americans in 2010. The magnitude of these income drops has risen as well. In 1986 the median loss of greater than 25% was 43% of the previous year’s income while in 2010 that value stood at 47% (3). Over this 25 year span more Americans are facing significant financial loss without sufficient buffering and the amount that these Americans are losing has increased. Considerations are given to the cyclical nature of the American Economy and the fact that economic security does shift in accordance with the general health of the economy. However, the issue stems from the fact that even though the economy may recover fully after a correction or recession, economic security does not. With each economic downturn the level of economic security decreases and fails to return its pre-crisis heights. This effect was clearly seen in the most recent economic crisis as a result of the record median unemployment duration seen during this time. By 2010 even though national economic output had recovered, the job market lagged behind and as a result more Americans were left in a position of economic insecurity. All of the aforementioned affecting phenomena had an impact on the continued decrease of national economic security, with the largest contribution stemming from an increased likelihood of significant income loss. Moreover, increases in household debt and MOOP spending while family incomes have largely stagnated has led to a decrease in available household income. Meanwhile, typical financial wealth holdings have hovered consistently around zero during the observed time span leaving most Americans without any form of financial safety net.

As far as which demographics saw the most severe impacts based on this metric, the picture painted by the data is very similar to that of other vulnerability trends. Hispanics and African Americans experienced economic insecurity at rates of 26% and 25.8% respectively during the economic downturn figures approximately 5 percentage points larger than the national average during that time. Similar disparities can be seen with regards to level of education. 25.8% of families headed by individuals lacking a high school degree suffered economic loss without sufficient buffering, meanwhile this figure stood at only 15.8% for households headed by someone with post-collegiate education. Family compositions and age distributions tell similar stories with single parent households and individuals ages 18-34 experiencing uniquely high levels on insecurity (3).

Developing an effective metric to record economic security concerns social scientists because this measure can be seen as a close analog to tracking the quality of life Americans experience. Based on the ESI, which serves as one of the most comprehensive representations of recent levels of American economic security, the quality of life enjoyed by Americans is decreasing. This assertion holds true for Americans on the whole and is especially true for Americans in particularly vulnerable or marginalized groups. In many ways the writing is on the wall when it comes to economic security and what remains to be seen is how we stem the tides of these shifts. Whether we decide to preserve a certain quality of life for all Americans or continue down this current path at the general public’s expense.

Sources:
1.) http://journal.sjdm.org/9118/jdm9118.pdf
2.) https://link.springer.com/article/10.1007/s11205-006-9080-4
3.) https://www.frbsf.org/economic-research/files/wp12-21bk.pdf