Economists are divided on whether or not the US will experience a recession in 2023, but there is general agreement that growth will slow significantly.
This has raised concerns about a potential “richesession,” in which the wealthy would be insulated from the effects of the economic downturn, while lower-income groups would be disproportionately impacted.
As David Philippy, a historian specializing in US economic thought at CY Cergy Paris University, pointed out, this would be a departure from the typical pattern in which the poorest are the first to suffer during a recession.
This concern was echoed in a Washington Post headline from late December, which proclaimed, “White-collar workers bear brunt of downturn.”
The slowing economy has disproportionately affected tech industry employees, with the Washington Post reporting that over 80,000 tech workers were laid off by the end of November.
This trend has continued, with Amazon announcing plans to lay off 18,000 workers in the coming year. However, it is worth noting that many of the companies making these layoffs have a history of offering high compensation to their employees.
The median annual salary at Meta (Facebook’s parent company) is $295,785, and at Twitter, it is $232,626, according to the Wall Street Journal (which is about five times the median annual income in the US). Both companies have announced significant layoffs.
The stock market has also had a negative impact on the wealth of wealthy Americans.
In 2022, Wall Street saw its worst performance since 2008, with the S&P 500 (an index of 500 top US companies) falling by 20%. Tech companies were among the hardest hit on the index.
Despite increased accessibility to the stock market in recent years, stock ownership is still largely concentrated among the wealthy, according to Martial Dupaigne, an economist at the Toulouse School of Economics and Paul-Valéry University in Montpellier.
This means that the current economic situation may be particularly detrimental to this group.
“Stock prices reached spectacular levels during the Covid pandemic,” as explained by him, “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.”
Contrary to expectations, the lower end of the wealth divide has seen some improvement. This is due to a “relatively healthy” labor market for unskilled workers seeking employment, according to Tobias Broer, an economist at the Paris School of Economics.
In contrast to tech giants, companies that hire workers at the lower end of the wage scale are having difficulty finding new staff.
The hospitality sector, for example, is still about one million workers short compared to February 2022, when Covid cases began to surge. This puts workers in a strong position to negotiate pay raises.
In fact, the Federal Reserve has found that the incomes of the poorest households have risen by 7% since the end of 2021.
The current economic situation has the potential to create an unprecedented “richesession,” in which the wealthy would be insulated from the effects of the recession while lower income groups bear the brunt of the economic downturn.
However, some experts believe that the recession could end up having a more traditional impact, affecting all income groups. While some non-tech companies, such as Goldman Sachs, have announced significant layoffs, it is too early to draw conclusions about the extent of white-collar job losses based on the tech industry alone, according to Broer.
It is also important to note that not only millionaires own stocks; pension funds, such as 401Ks, are also linked to the stock market, so a fall in the market could impact ordinary people saving for retirement, as Philippy pointed out.
Analysts also argue that it is short-sighted to focus on the current strength of the labor market for low-paid workers. Comparing tech layoffs to this dynamic labor market “makes little sense” because senior middle managers tend to remain unemployed for shorter periods of time, according to Pierre Gervais, an expert on US economic history at the Sorbonne Nouvelle University.
In addition, measures such as interest rate hikes to combat inflation in the US will disproportionately impact lower income groups.
If central bankers and politicians want to bring inflation down to the target of 2%, “they’ll have to push wage increases down, and that would lead to a deteriorating labor market for low-paid workers,” according to Philippy.
According to Gervais, the Wall Street Journal article is flawed because it compares the economic situations of middle and upper management with that of unskilled workers, without considering that none of these groups can be considered truly wealthy.
Gervais argues that it is the super-rich, whose income is primarily derived from capital, who are largely unaffected by economic turmoil, such as layoffs or a drop in the stock market.
Philippy agrees with this assessment, adding that past recessions, including the one in 2008, have often started with stock market crashes that disproportionately impact the finances of the wealthy.
However, it is important to note that while the super-rich may be able to weather an economic downturn better than other groups, a recession can still have a domino effect and eventually affect even the most vulnerable members of society.
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