Income Volatility

Nice article from LA Times on volatility in family income. Basically, although Americans are getting richer, the size of annual fluctuations in income has also become larger. So, although people are earning more they are also putting up with more volatility from year to year.

In finance terms, the risk-adjusted growth in income, even for high earners, is less impressive than just the growth itself.

There was a brilliant study on this recently, which showed that the top 2% of earners had substantial income growth in recent years, but that they weren't *spending* more. Further analysis showed that there was a lot of movement of families in and out of the top category, due to career and job volatility - it is not the same people in the top category from year to year! Families know this, so in good years they don't necessarily spend as if they are confident of more good years in the future. A good example of this is the sales guys at my former company. One year, they might make $200K, but they could easily be unemployed for 6 months and make much less the following year.

When we compare U.S. economic performance with other countries, we might want to adjust our per capita income growth for the additional volatility that the average American now endures. Many would rather make less money if they can enjoy more security.