The rich cut their spending. That has hit workers hard
THE STEEPEST DECLINES IN SPENDING DURING THE CORONAVIRUS RECESSION HAVE COME FROM THE HIGHEST-INCOME PLACES
In the Manhattan restaurants around Lincoln Centre, the tips often rose and fell with the changing playbill. A popular classic musical could mean more preshow diners and more income. A more famous actress as Eliza Doolittle could do the same. The end of a big run, like “My Fair Lady,” meant the opposite: Tips would be down for a while.
“We were dependent on how well shows were doing at Lincoln Centre, and we really did pay attention,” said Emma Craig, who was a server at the Atlantic Grill a block away before the coronavirus crisis.
She has not returned to that job yet, or to another singing at a private supper club downtown. In both jobs, she said, “I am dependent on the trickle down.”
The recession has crushed this kind of work in particular: service jobs that depend directly on the spending — and the whims — of the well-off.
Economists at the Harvard based research group Opportunity Insights estimate that the highest-earning quarter of Americans has been responsible for about half the decline in consumption during this recession. And that has wreaked havoc on the lower-wage service workers on the other end of many of their transactions, the researchers say.
“One of the things this crisis has made salient is how interdependent our health was,” said Michael Stepner, an economist at the University of Toronto. “We’re seeing the mirror of that on the economic side.”
As income inequality has grown in America, so has inequality in consumption. That means that when the rich spend money, they drive more of the economy than they did 50 years ago. And more workers depend on them.
Businesses affected
Put another way, this particular economic shock — one that has halted much in-person spending, even by rich people who never lost their jobs — has been devastating for an economy in which many low-wage workers count on high-income people spending money.
Stepner and economists Raj Chetty, Nathaniel Hendren and John Friedman have collected data from credit card processors, payroll firms and other private companies tracking how and where people spend their money, and how businesses and their workers have been affected as a result. By tying debit and credit card spending back to the home ZIP codes of millions of anonymised cardholders, they estimate that households in the bottom quarter of ZIP codes by income cut their spending by about 30 per cent from pre-coronavirus levels at the lowest point in late March. Now, with the help of government stimulus, lowincome spending is down only about 5 per cent.
For the highest-income quarter, spending has recovered much more slowly, after falling by 36 per cent at the lowest point. “It’s not just that it’s somewhat bigger in percentage terms,” Chetty said of shifts by the rich. “In absolute dollars, that’s like half of the game.”
The researchers point to several curious patterns tied to that fact: Unemployment claims have been high in rich counties that were largely immune to the last recession. And lower-income Americans living in those richer counties have been hit particularly hard. Their spending fell further than the spending of lower-income workers in poorer counties.
At the ZIP code level for small businesses, the steepest declines in revenues and hours worked have been in the highest-income neighbourhoods. That’s a pattern that can’t fully be explained by differences in coronavirus cases. In the ZIP code where Craig worked, near Lincoln Centre, small-business revenue fell by 72 per cent at the lowest point. It’s still down by half.
Service-sector recession
In past recessions, the service sector has been one of the most resilient parts of the economy. In down times, consumers typically cut back on big durable goods. But while you can drive your car a little longer, you may not be able to stretch out your next trip to the dry cleaners for a year or two. The restaurant industry has
even been the place where laidoff workers in other parts of the economy have found work in the past.
So we have never seen anything that looks quite like this service-sector recession — one where the bartenders lost their jobs before the construction workers, where previously thriving restaurants and salons have experienced the steepest losses.
The service sector had also been expanding over time, replacing blue-collar jobs in manufacturing that were more stable and paid more. Especially in big, expensive cities, the vast service sector is now the place where the rich and the poor meet.
Steeper job losses
Now cities like Washington that were relatively unscathed by the Great Recession — thanks to their high median incomes and all their service jobs — stand to be hurt far more deeply in coronavirus. Initial unemployment data bears this out. Through April, Washington lost 10 per cent of its jobs. During the Great Recession, the city increased employment by 3 per cent.
San Francisco and San Mateo counties have lost 16 per cent of their jobs during the pandemic, roughly in line with job losses nationwide. During the previous recession, those counties gained jobs while employment in the rest of the country fell 3 per cent overall and nearly 5 per cent in the poorest counties. Unemployment was even more uneven in the 2001 and 1991 recessions, with steeper job losses in poorer counties.
In recent weeks, spending by the poor has nearly rebounded to pre-crisis levels, thanks to federal stimulus checks — lowincome consumption shot up after April 15 the moment they were deposited — and to expanded unemployment benefits. But the jobless rate remains at its highest level since the Great Depression. High-income spending has been much slower to return. Some consumption has also shifted online, which doesn’t help local businesses.
Patricia Namyalo, a server in a hotel restaurant on Capitol Hill in Washington, is gloomy about what’s ahead. She recalls when business began to dwindle in early March, before the city’s shutdown went into effect, and well before members of Congress, who sometimes dine at the hotel, recessed for the crisis. “There were days when we went to work and had a total of eight tables come in for brunch,” said Namyalo, a 38-year-old immigrant from Uganda. “And that’s supposed to be shared among four people.”
As income inequality has grown in America, so has inequality in consumption. That means that when the rich spend money, they drive more of the economy than they did 50 years ago.
We were dependent on how well shows were doing at Lincoln Centre, and we really did pay attention.”
Emma Craig | Server, Atlantic Grill
There were days when we went to work and had a total of eight tables come in for brunch.”
Patricia Namyalo | Server, Capitol Hill