Federal Reserve Bank of Minneapolis: Where has all the Income Gone?
The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and occrued almost entirely to the rich.
The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.
Why does the debate about middle America matter? Because an accurate assessment of the economic progress of middle America is a crucial input in formulating good public policy. Claims of long-term middle America stagnation—such as those quoted at the beginning of this article—are often part of a broader argument about the adverse impact of globalization, outsourcing and free trade. And middle class stagnation is used as motivation for a specific set of policies. But if middle America has not stagnated—as this analysis has shown—then this motivation for those policies is without merit.
Furthermore, if it is understood that middle America has indeed experienced substantial gains, policy priorities may change. For example, more emphasis might be placed on policies that promote continued economic growth or that target deeply rooted poverty rather than middle class stagnation. But regardless of the specific policy, policymakers and the public should base their decisions on an accurate assessment of how the economy has impacted and continues to impact people's lives.
This article has several well-done graphs that illustrate some of the points I've made repeatedly on this blog.
So how can per person income rise while household income remains relatively stagnate? Household composition is key and has changed significantly over the last thirty years.
… or in the tabular form …
Notice the 20% drop in the proportion of households consisting of married couples (63.5 to 50.5) combined with more than a 20% increase in the proportion of households headed by females with no spouse present (22.9 to 27.7) and a new near doubling of households with only a man present (9.3 to 16.6). As you can see in the table above, these single-headed households have much lower incomes on average than married couple households. Let's look at the household income for the four types of households in the chart above independently. Median income has risen significantly for each type of household over the last thirty years. What has changed is that significantly more adults are living with no spouse.
Think of it this way. A 1976 household has two people that earn $20,000 (inflation-adjusted income) for a household income of $40,000. Both individuals experience an increase of 80% in their real income; by 2006, their household income is $72,000.
A second household also has two people making $20,000 with a household income of $40,000 in 1976. Both individuals experience an increase of 80% in their income, but they are living apart by 2006. This means there are now two households, and the median household income is $36,000 instead of the $72,000 above, even though the personal income is the same in both households. The aggregate median household income will fall if there is a growing trend toward this single living arrangement.
This table shows that while median household income increased only by 26%, each household category's median income improved beyond that. The fact is that more people have shifted from a high-earning married couple household to living in a single adult household over the last thirty years. The changing nature of household formation significantly masks economic growth in wages and income. (Another side issue is that top quintile households have about 3.2 people per household while bottom quintile households have only about 1.9. Thus, on a per capita basis, incomes are closer than they first appear.) Check out this revealing table.
Further adding to the confusion is that most reports about median household income use Census data which does not include non-monetary distributions. When we add this in, we get the following picture.
The article acknowledges that the highest part of the highest quintile has grown significantly faster than the rest of the distribution. But this is not a case of the rich getting richer while the middle class stagnates or gets poorer.
Imagine comparing times for swimmers in the men's freestyle event for the 2004 and 2008 Olympics. Suppose the 2nd through 8th place finishers in 2008 swam one second faster than their counterparts in 2004. But Michael Phelps won the race by swimming three seconds faster than the previous winner. Do we now say the fast are becoming faster and the slow are becoming slower because of the growth in the difference between the fastest and slowest? Of course not, but this is precisely what so many activists would have us think about income inequality.
Finally, this article talks about the fact there has been growing inequality. I believe this article looks at data through 2006, which misses an important development.
The GINI Coefficient is a number used to measure and compare inequality. A score of 1 is perfect inequality, and 0 is perfect equality. It is now usually measured in terms of households, although it was originally in terms of families. In 2007, the US GINI dropped from 0.470 to 0.463. That is the largest one-year move in either direction for households since household numbers were first calculated in 1967. The GINI in 2000 was 0.462 at the end of the Clinton administration. There has been no net change over the last seven years.
In short, claims of stagnating middle-class wages and rapidly growing inequality are the stuff of campaign fantasies, not economic reality.
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