As gender dynamics in the home and workforce have continued to change (e.g., girls now outperform boys at every level of school and breadwinner mothers are increasingly becoming the norm), parents are no longer burdened with as strong of stereotypes influencing which parent (or both) should work. Which means parents have more opportunity than ever to be strategic in deciding how to structure their household, but with that increased flexibility also comes greater financial stakes – particularly for affluent households who are generally presumed to have both the most income potential as a dual-income household and the most opportunity to live off of one spouse’s earnings.
In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – examines why having two household incomes is not necessarily better than one, particularly given the ways in which real-world households tend to structure their expenses, and the potential to leverage the “non-linearity premium” to boost lifetime earnings for households with one earner instead of two.
Households with two incomes are generally considered to be more financially secure than households with one. However, research from Elizabeth Warren and Amelia Warren Tyagi indicates that despite the dramatic rise in total household income as families moved from a single-earner to a dual-earner structure (from the 1970s to the early-2000s), total discretionary income actually declined over that same time period. Which means total fixed expenses also rose dramatically (primarily due to the need to purchase a second vehicle and housing inflation as parents engaged in bidding wars to get their children into the best school districts), at the same time that families were losing an important financial safeguard: the ability for a non-working spouse to enter the labor force during a financial shock. Ultimately, this leads to the counterintuitive insight that dual-income households may actually be more fragile when facing a sudden loss of one spouse’s income… but also an important corollary, that dual-income households can be most secure when they live off one spouse’s income instead of two!
Additionally, while it would seem that dual-income households have an obvious advantage in total earning potential, this isn’t necessarily the case. In some fields – particularly business, finance, and law – earnings potential exhibits what Harvard economist Claudia Goldin calls a “non-linearity premium”, which means that someone who works half-time is generally going to receive less than half-time pay, whereas someone who works double the normal hours has the potential to receive more than double the compensation. In other words, a lawyer working 80 hours per week will generally outearn two lawyers each working 40 hours per week, and this is particularly true considering that a lawyer working 80 hours per week can expect to “peak” much higher in their career (e.g., making partner at a prestigious firm) than two lawyers each working 40 hours per week and sharing household responsibilities.
Ultimately, there are many financial considerations for households contemplating a dual-income versus a single-income approach… from emergency fund savings and disability insurance, to maintaining the earning capacity of a non-working spouse and considerations for divorce… and there are certainly many other non-financial considerations as well, but the reality is that it’s not necessarily true that two incomes are always best. In terms of increasing financial stability and lifetime earnings potential, sometimes two incomes are not better than one!
source https://www.kitces.com/blog/dual-income-households-financial-stability-single-income-nonlinearity/?utm_source=rss&utm_medium=rss&utm_campaign=dual-income-households-financial-stability-single-income-nonlinearity
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