Income disparity is rising – what it means for your credit union

According to data from Harvard University, income growth has been widening income disparity since 2010. The average annual income of households in the bottom decile of earners increased just 5% from 2010 to 2019, or about $340. In contrast, the average income of households in the top decile soared by 20%, or about $52,000. 

While income disparity has been on the rise in the United States for the past decade, the COVID-19 pandemic exacerbated disparities in employment and household income across the country. This means that some of your members are purchasing new homes and doing relatively well-off financially, while others are facing financial crises, dealing with unemployment, and struggling to make ends meet. 

In this article, we’ll take a deep dive into the growing wealth and income gaps that are becoming more apparent as we enter into a period of economic recovery. We’ll discuss the disproportionate impact the pandemic has had on low-wage workers, and examine what data from the housing market reveals about income disparity today. We’ll also give you tips for adjusting your credit union’s messaging to tactfully engage with members who are facing financial hardship.

Low-Wage Occupations Experience Disproportionate Negative Impacts During a Recession

According to Forbes, the United States officially entered a recession in February 2020, which marked the end of a record 128-month period of economic expansion that began in June 2009.

Rising income inequality during economic downturns is a direct consequence of worsening labor market conditions. Occupation data from Deloitte reveals how the economic landscape during recessions has historically exacerbated income disparities throughout the economy, due to the disproportionate impact of recessions on lower-paid occupations. In their study, the pay rate for low-wage occupations ranged from $12.30-$18.84 per hour; medium-wage occupations ranged from $20.09-$28.47; and the mean hourly rate for high-wage occupations was between $36.62 and $58.44.

  • In the recession of March 2001–November 2001, low-wage occupations bore the brunt of job losses, and it is again low-wage occupations that are suffering the most in the current recession. 
  • During the economic downturn from November 2007–June 2009, employment in the United States fell by 4.5% in low-wage occupations and 5.4% in medium-wage occupations; the corresponding decline in employment in high-wage occupations was just 0.6%. 
  • Between February and May 2020, employment in low-wage occupations fell by 19.8% and medium-wage by 14.2%. This was far higher than the 3.6% decline for high-wage occupations. 

Effects of the COVID-19 Pandemic on Income Disparity

The pandemic has negatively impacted those engaged in low-wage occupations much more than those who have higher-paid jobs. According to the Deloitte report cited above, “The people likely to suffer most, both economically and health-wise, during the ongoing recession are those who are engaged in occupations where the ability to socially distance from customers and from each other is extremely low.”

Perhaps the hardest hit sector of the economy during the pandemic has been the restaurant and hospitality industry. Service-related professions such as hair stylists, massage therapists, and car mechanics have also struggled through periods of nationwide lockdowns and slow business reopenings.  

It’s worth mentioning that these two occupational categories—food preparation and serving, and personal care and service—are also, on average, the lowest-paid occupations in the country. Employment in these and other similar low-wage positions was severely disrupted during the COVID-19 pandemic. 

The total employment in food preparation and serving occupations fell by 43.3% between February and May 2020—the highest among all 22 major occupations—followed by a 37.3% decline in personal care and service occupations.

What the Housing Market Reveals about Income Disparaity in a Post-Pandemic Environment

In 2017—the most recent year from which U.S. Census Bureau data is available—homeowners had a median net worth of $269,100, while renters had a median net worth of just $3,036. The pandemic has almost certainly intensified this gap.

At the height of the pandemic, record low mortgage rates encouraged many families who had the means to do so to purchase homes. Those who already owned homes going into 2020 were able to take advantage of attractive refinancing rates. 

According to a report from the Joint Center for Housing Studies at Harvard University, there was a 20% rise in purchase loan applications in Q3 2020 from a year earlier, and 2.8 million refinances through the first half of 2020—more than triple the level over the same period in 2019. 

Data from the same report reveals that while this booming real estate activity was taking place, more than 6.3 million homeowners entered a mortgage forbearance plan between March and October 2020. 

The economic fallout from record levels of unemployment in the spring of last year left millions of people struggling to make rent, or falling behind and having to rely on temporary eviction moratoriums to avoid homelessness. 

In a recent Time article, Jung Hyun Choi, a research associate with the Housing Finance Policy Center at the Urban Institute, said, “Renters [have been] disproportionately hurt by the crisis. A greater share of renters lost their jobs. That meant losing savings that could have been used for a down payment, and falling behind on bills, which will hurt their credit and make it more even more difficult for them to be future homeowners.”

The resulting imbalance has resulted in a further widening of the gap between the wealthy and poor in this country.

Tactfully Engaging Members Who Are Struggling Financially

What does rising income dispartiy mean for your credit union? For one thing, you may start to notice an uptick in collections activity in the coming months as many financially burdened members struggle to make ends meet.  

Tactfully and effectively servicing these members will require your institution to adopt messaging that addresses their situation with empathy and compassion.

When interacting with a past-due credit union member, strive to work with them to create a win-win solution for both parties. Communicate to your members that your goal is to find a mutually beneficial solution. You want to help them bring their account to a current status to avoid additional fees, charge-offs, or repossession. Look at each collection call as an opportunity to collaborate with your members to find a solution. This will help you build trust and strengthen the relationship the member has with your credit union.

SWBC offers a scalable solution that saves our outsourced collections clients an average of 35-50% annually when compared to in-house efforts. Visit our website to see how much you could be saving today! 

Brad Eral

Brad Eral

As the Account Vice President for SWBC’s Financial Institution Group, Brad Eral services financial institutions throughout the Midwest within lending services, insurance, and loss mitigation programs. Prior to joining ... Web: Details