Get ready for the Richcession

Except for a small number of ascetics, no one likes to be poor. Living without, living with so few savings that setbacks such as illness or job loss can be debilitating is a ubiquitous source of stress. But for many poorer people, the years since the Covid crisis have been a little easier financially than the years before. Several rounds of government relief helped them weather the early stages of the pandemic, and now a tight labor market is bringing them wage increases that will take the bite out of the economy inflation to decrease. Federal Reserve figures show that the net worth of households in the bottom quintile by income was 42% higher in the third quarter from late 2019 and 17% higher from late 2021. A wage tracker developed by the Federal Reserve Bank of Atlanta shows that the 12-month moving average of annualized monthly wage growth for workers in the bottom quartile by income was 7.4% in November.

With the important caveat that they started from much higher bases, the percentage gains for the rich were more muted. The net wealth of households in the top quintile was 22% higher in the third quarter from pre-pandemic levels and down 7.1% since the end of 2021 – a result of the falling stock market. Paychecks haven’t risen as much either, with the Atlanta Fed’s metric showing average annual monthly wage growth for top-quartile workers was 4.8%.

Recent layoffs have also unduly hit higher-income workers. Many of the tech companies that have made headlines with layoff announcements are paying very well. For example, securities filings show that the median worker at Meta Platforms, Facebook’s parent company, made $295,785 in 2021, while the median worker at Twitter made $232,626. And layoffs where the typical worker is paid less well, like Amazon.com, are largely targeting white-collar workers.

The consolation for higher-income workers who are laid off is that it should be relatively easier for them to find new work than for poorer people who lose their jobs. This is because the professional skills of people with higher education are generally more transferrable than the skills of other workers. But they will still have to tighten their belts for a while, and they may not be paid quite as well in their new jobs as they were in their old ones.

While large company layoffs have grabbed the headlines, so far they have not had a major impact on overall employment statistics. This is partly because industries that aren’t as heavily represented in the stock market and typically employ more low- and middle-income workers are still scrambling to hire workers. In November, leisure and hospitality were missing 980,000 jobs from February 2020 employment levels. Health and social care employment only recovered to pre-pandemic levels in September. This is a job category that has grown in part due to the needs of an aging population, even as overall US unemployment soared after the 2008 financial crisis. To return to its growth trend in the decade before the pandemic, around 1.1 million jobs would need to be created.

That need for labor — especially as more Americans turn to services like restaurants — is one reason why even among economists who are expecting a recession in the coming year, many don’t believe the job market will take a major hit will. This puts poorer Americans in a better position than usual to cope with a weak economy. Not only are their finances in relatively good shape, they are also less likely to suffer serious job losses.

As we head into the new year, companies that cater to the affluent may be disappointed, while those that prefer the hoi polloi to the hoity-toity may fare better. And if a recession does hit, the economy could be much more balanced than it normally is when the recovery begins.

Authors: Justin Lahart at Justin.Lahart@wsj.com