[Dongeul Dongeul] "Rich People Collecting Unemployment Benefits"... US 'Richession' Breaking Traditional Economic Notions

Recently, as central banks around the world have embarked on aggressive interest rate hikes to curb soaring inflation, dark clouds have gathered over the global economy. Despite this situation, the United States is showing a relatively bright economic outlook. The market is placing weight on the possibility of a 'soft landing,' where the U.S. overcomes the inflation crisis and experiences a mild economic slowdown.

However, this hope does not seem to apply to the wealthy in the U.S. Recently, wealthy Americans have been experiencing economic difficulties as if an economic recession has already hit the country. This phenomenon breaks the conventional belief that during an economic recession, low-income groups suffer the most while the wealthy only face minor inconveniences. Today, we will explore why the so-called 'richcession,' a recession limited to the wealthy, has arrived.

One-Third of U.S. Unemployed Are IT Workers... Increase in Unemployment Claims Among High-Income Earners

Recently, the U.S. labor market has seen a significant number of high-income earners losing their jobs. According to the Bank of America (BofA) research institute, the number of unemployment benefits claimed by high-income groups has recently surpassed that of lower-income groups. A survey conducted by BofA across 30 states that provide unemployment benefits revealed that as of April, the number of unemployment claims from households earning over $120,000 annually (about 160 million KRW) increased by 40% compared to the previous year. This rate is more than five times higher than the increase rate for households earning less than $50,000.

The large-scale layoffs of wealthy individuals are primarily due to massive cuts in IT companies. Major IT firms, known for offering high salaries, have undergone restructuring since the pandemic, leading to an increase in unemployment centered on high-income earners.

Meta, the parent company of Facebook
Photo by Reuters Yonhap News

In fact, according to the U.S. job-related company Challenger, Gray & Christmas, one-third of the layoffs announced by companies this year came from IT companies such as Meta, the parent company of Facebook. Last year, the average salary of Meta employees was $296,320, nearly 400 million KRW. Similar to when Ford conducted mass layoffs focusing on highly skilled engineers, this time too, restructuring appears to have targeted high-wage employees.

Meanwhile, the overall U.S. labor market remains robust. Recently, the number of unemployment claims in the U.S. has stayed around 220,000 on average since last year, which is significantly lower compared to early 2020 when COVID-19 spread. Companies have been complaining about severe labor shortages since the end of the pandemic, resulting in an abundance of job openings.

Supermarket in California
Photo by AFP Yonhap News

Especially, since most job demand is concentrated in low-skilled service industries, low-wage workers have been able to enjoy improved conditions compared to before. According to the Atlanta Federal Reserve Bank’s wage tracker, as of May, the wage increase for the bottom 25% income group was 6.8%, surpassing the 5.6% increase for the top 25%. As companies compete to raise wages to attract service sector workers, wage inequality between the wealthy and low-income earners, which had persisted for 40 years before the pandemic, is said to have shrunk to one-quarter.

Decline in Wealthy Individuals' Income... Negative Impact on U.S. Domestic Economy

The richcession is expected not only to cause economic hardship for the wealthy but also to eventually impact the U.S. domestic economy.

The Bank of America research institute reported that credit and debit card spending on discretionary consumer goods by the wealthy decreased in April compared to the previous year, while spending by other households increased. Discretionary consumer goods refer to items that are not essential for daily life but are consumed depending on household financial status, such as leisure and luxury goods. Sixty percent of sales in the discretionary consumer goods market come from the consumption of the top 40% income group, the wealthy.

The U.S. luxury industry, supported by the wealthy, is now facing an emergency. High-end hotels in the U.S., where accommodation costs can exceed $1,000 per night, and travel agencies offering luxury travel packages have largely relied on the billion-won bonuses that high-income earners receive at year-end.

However, as IT companies reduce bonuses and proceed with layoffs, five-star hotels and travel agencies are expected to face revenue declines. Airlines, which deliberately increased ticket prices and limited flights to target high-income travelers, are also likely to encounter difficulties.

The richcession breaks the traditional economic notion that low-income groups suffer more during economic slowdowns. With expectations for a soft landing, attention is focused on whether the U.S., a major economic power that has demonstrated its strength, can overcome the richcession.