Will the US see a ‘richsession’ – or will economic turmoil hit the poor hardest?

Issued on: 07/01/2023 – 17:19

Even if economists are not quite unanimous in forecasting a US recession in 2023, there is little doubt that growth will slow significantly. In this context, a “richsession” would make a big difference from the “usual pattern, in which the poorest are first to suffer”, noted David Philippy, a historian specialising in US economic thought at CY Cergy Paris University.

“White-collar workers bear brunt of downturn,” proclaimed a Washington Post headline in late December.  

Recent layoffs across the tech industry add to this narrative of who is getting hit hardest by the slowing economy, with the Washington Post reporting that more than 80,000 tech employees had been laid off by the end of November. And that was before other such announcements followed; Amazon said on January 4 that it plans to shed 18,000 workers this year.

But it bears noting that many of the companies announcing widespread layoffs have a history of offering their employees generous compensation. The median annual salary at Meta – Facebook’s parent company – is $295,785, while at Twitter the median annual salary is $232,626, according to the Wall Street Journal (which is around five times the median annual income in the US). Both companies have announced big layoffs.

The state of the stock market is another, broader factor draining the wallets of wealthy Americans. For Wall Street, 2022 was the worst year since 2008: the S&P 500 – an index of 500 top US companies – fell by 20 percent. Tech companies were some of the worst-affected stocks on the index.

Despite access to the stock market democratising somewhat over recent years, stock ownership is still mostly the preserve of the affluent, said Martial Dupaigne, an economist at the Toulouse School of Economics and Paul-Valéry University in Montpellier.

So the current situation may well be especially bad for them, Dupaigne continued. “Stock prices reached spectacular levels during the Covid pandemic, with companies like Apple and [Google parent company] Alphabet seeing their value increase by around a trillion dollars over two years. If there is no bounce back, this current plunge in valuations could wipe out very large sums for well-off investors in these companies,” he explained.

At the bottom of the wealth divide, things are looking up, surprisingly. This is because the labour market is in a “relatively healthy state for unskilled workers looking for jobs”, said Tobias Broer, an economist at the Paris School of Economics.

Unlike the tech giants, companies who recruit workers at the lower end of the wage scale are having trouble finding new staff. The hospitality sector, for example, is still about one million workers short compared to February 2022, when Covid cases started taking off. That puts workers in a strong position to negotiate pay raises.

Indeed, the poorest households’ incomes have risen by 7 percent since the end of 2021, the Federal Reserve found.

A short-lived ‘richsession’?

All these factors would make the expected recession unprecedented in nature. But experts say the economic crunch could end up biting in traditional fashion.

Some prominent non-tech companies have announced significant layoffs – most notably Goldman Sachs. But it’s still “too early to generalise” about white-collar redundancies by extrapolating from the wave of tech announcements, Broer said.

And millionaires are not the only people who own stocks. “We mustn’t forget that pension funds [such as 401Ks] are also linked to the stock market, so if it falls, a lot of ordinary people saving for their retirements will be affected,” Philippy observed.

Analysts also say it’s short-termist to focus on the labour market’s current strength for low-paid workers. Comparing tech layoffs to this dynamic labour market “makes little sense, because senior middle managers tend to remain unemployed for much less time”, said Pierre Gervais, an expert on US economic history at the Sorbonne Nouvelle University.

Not to mention that measures like interest rate hikes to combat rampant inflation in places like the US will end up hurting the poorest the most. If central bankers and politicians want to bring inflation down towards the 2 percent target, “they’ll have to push wage increases down, and that would lead to a deteriorating labour market for low-paid workers”, Philippy said.

And while senior executives are the hardest-hit from economic turmoil at the moment, past precedent suggests a recession would have a domino effect, eventually hurting the economically vulnerable. “Several major recessions in the US started with stock market crashes that hit the wallets of the wealthy, including the 2008 crisis,” Gervais said.

The Wall Street Journal article “doesn’t really hold water, because the whole article is aimed at contrasting the situation for middle and upper management with the situation for unskilled workers, while neither group is really rich”, Gervais said. “By contrast, the super-rich aren’t affected by the economic turmoil.”

Philippy agreed. The WSJ article “doesn’t really concern the super-rich in the US, whose income comes mainly from capital” and who are little affected by layoffs or by a temporary drop in the stock market, he said.

This article was translated from the original in French.