Accounting for Income Changes Over the Great Recession Relative to Previous Recessions: The Impact of Taxes and Transfers

Using decomposition analysis together with March CPS data, we consider the relative importance of factors accounting for changes in post-tax, post-transfer income during each of the last four recessions. Unlike the double dip recession of the 1980s, employment drops rather than falling wage earnings drove income declines during the Great Recession. Furthermore, taxes and transfers played a much greater role in offsetting market income losses — a result largely missed in analyses not accounting for taxes and transfers. This is particularly so among the bottom quintile where lower taxes and increased transfers offset more than one-half of market income declines.