Some thoughts on income growth

Some comments on this issue from Brookings (left-leaning)

People who think middle-income living standards have stopped rising, if they are well informed, are thinking of living standards over a fairly brief period – say, the last five or ten years, when living standards have been affected by a steep recession and anemic recovery. Alternatively, if they’re thinking about living standards over two or three decades, they are only thinking about the trend in living standards within fairly narrow slices of the population – unmarried men in their 20s and early 30s who have below-average schooling, for example, or groups that have been particularly hard hit in the recent slump.

Americans in the broad middle and at the bottom of the distribution have, on average, seen their real incomes and consumption improve over the past three decades.

Why is this claim so controversial? There are four main reasons:

– A defective price index, which makes unwary observers think real incomes are climbing more slowly than they really are.

– Household income measures that fail to account for shrinking household size. If median household
income has remained unchanged (and I’m not saying it has), then shrinking household size means there is an increase in the amount of income per household member.

– Incomplete measures of income, in other words, definitions that exclude or undercount sources of income particularly important at the bottom and in the middle of the income distribution than they are at the top.

– Finally, inequality has unquestionably increased over the past 30 years (and in the past 10 years and 20 years). This means that average living standards have improved faster than median living standards. More of the economy-wide income gains have been enjoyed by Americans with a high perch in the income distribution; smaller fractions have been received by people in the middle and at the bottom.

Improvements in median living standards are nonetheless continuing, at least if we take a long enough perspective.

US Census Personal earning data

Note: This data is from the US Census CPS on people (actual earners), not households and not families.  This also excludes non-cash benefits like healthcare (which is significantly larger today than it was in the 60s, 70s, and 80s.  It also is pre-tax so real disposable income would be even larger relative to earlier decades.

This chart from the Brookings Institute shows some of this not captured drift:

Congressional Budget Office — household incomes

These three charts on after-tax income data give a better perspective on household income growth.  This accounts for household size, healthcare benefits, transfers, and taxes…

 

Note: Baseline is 1979 (1 or 100%).

 

Long story short: According to the CBO’s analysis the average household in every quintile has seen a 30-40% increase in real disposable income.

CBO source here

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