Where has US household income gone ?

I was at a seminar the other week on inequality in US household income, and I asked the speaker about something that’s puzzled me for a while. I didn’t really get an answer, so rather than do a lot of work myself, I thought I’d try this crowdsourcing all the cool kids are talking about. Here’s the puzzle.

Over the past 40 years or so, real median US household income has risen by about 30 per cent.

US Household income 1965-2005
US Household income 1965-2005

but real US GDP per person has more than doubled. How can this be ?

I’ve done enough work to rule out a couple of easy answers. Average household size has fallen from around 3 to 2.6, but that’s not enough to account for more than a small part of the gap. And inequality as measured by the ratio of mean to median household income has gone up, but again, not enough to account for the gap. In fact, even top quintile income hasn’t quite kept up with GDP per person.

Income by quintile
Income by quintile

So it seems as if the ratio of total household income to GDP must have fallen. Where has the extra income gone.

My candidate answers:
(1) A big chunk of income goes to the top 1 per cent of households and isn’t captured by the survey. The seminar gave some support to this idea, at least insofar as this group seems to have a big enough share of the total that the choice of the point where the Census Bureau stops measuring income makes a big difference
(2) A lot of income is flowing to the corporate sector and never being recorded as household income, perhaps because it is distributed in the form of capital gains, which aren’t counted. Again, a very large chunk of these would go to the top 1 per cent.

41 thoughts on “Where has US household income gone ?

  1. jquiggin you have made comments on the divergence between quintiles based on the naive graph posted. There is no evidence of any significant divergence on the data you have displayed if an appropriate semi log scale is used?

    That still doesn’t explain the conundrum but hey …..

  2. Hi John,

    It looks like the GDP per person link that you put up for this post refers to nominal GDP per person, not real GDP per person. Also, you need to watch out for the inflation index that’s used on a particular data series (GDP deflator, CPI Index, PPI Index, etc.).

    First, real GDP uses a price deflator (I believe this is true but I might be wrong). So, instead of using the price deflator, I calculated real GDP using the CPI Price Index. With this measure, real GDP per person only grew 76% from 1967 to 2007, not 200%. I believe that CPI is also the same measure used to add inflation effects back into household income data. Thus, using the CPI index puts the two measures on equal footing.

    Secondly, if you factor in the decrease in household size from 3.3 to 2.57 over the last 40 years – voila – you get the 38% change in household income that you’re looking for.


  3. Trying to eyeball the above graph on (absent)percentages it would appear that the anomalous result is the light blue third one up … slack growth on that quintile where the bulk of workers are. Maybe not surprising given this is where globalisation should show up?

  4. Does Shaeffer’s figuring (way over my pay grade) account for a quarter of the US workforce earning less than the minimum wage of 1968 as of June last year (before the first meager incremental increase) — double the average income later?

    Does it account for the same gap between median income and per capita (average) output not opening up in Europe (where labor is not asleep at the bargaining wheel: sector-wide labor agreements and all that kind of thing)?

    PS. For whatever it might mean to the figures: the Census inflation (CPI-U-RS — used exclusively it seems by the Census) yields lower inflation and higher growth than the BLS inflation (CPI-U — which almost everyone else follows). And again, since households can have only one person, a better look a distribution spread might be the family survey.

  5. Shaeffer’s numbers suggest that median income did not really go anywhere (I think that is what he means). I think that may be safely disputed by showing that median income share very clearly did go somewhere: downhill with the rest of 90 percentile earners.

    First, Census table shows per capita income (comparing apples to apples now) doubled from 1967 through 2007).

    Census mean family income quintiles table show:
    5th quintile mean grew 22.4% over that span;
    4th grew 31.4%;
    3rd mean (effectively median) grew 47.3%;
    2nd grew 64.6%;
    1st (w/o adjusting for top coding) grew 95.8%.

    If you play my little top coding adjustment game using per capita income for your overall growth gauge — as described above:
    1st quintile income grew 175.4%. (I mis-remembered above that my adjustment doubles top quintile income — rather it approaches doubling income growth.)

  6. Conrad, we are talking at cross-purposes. I was stating that income mobility in the US is
    (1) Lower than in other OECD countries
    (2) Lower than in the US a century ago, last time inequality was so great.
    Your graph shows constancy for men 1977-2000, which I don’t dispute.

    As regards women, the old view (in the 50s when this literature started) was that women’s income and social status were determined by that of their husband. Hence, it was said “women’s social mobility represents the correlation between men’s status and that of their fathers-in-law”.

    That’s no longer true of course, but it’s still true that men earn the larger share of household income, so women’s family income is greatly affected by their marital position.

  7. I attended a presentation on the distribution of gains from the “New Zealand Economic Miracle”.

    One of the observations in this seminar was that the increasing prevalence of salary packaging made comparing the gains of different income groups difficult.

    We know for example, that share allocations were common during the dot-com boom and were not limited to the “top 1 per cent”. Other employee benefits (paternity leave, health lower-level employees. Would these have been counted as household income, or corporate expenses?

    While such trends would not address the issue of trends for the poorest, it could help explain the overall gap. It could also suggests that gains are more widely spread than just the richest of the rich.

  8. “A lot of income is flowing to the corporate sector and never being recorded as household income, perhaps because it is distributed in the form of capital gains, which aren’t counted.”
    Probably true, but another way in which income and GDP can diverge is via the growth of the public sector, coupled with the interminable vagaries of accurately measuring household income.

    Let’s look at a couple of obvious examples. Take my widower aged pensioner father. He’s a freehold homeowner, with a modest bank account and a share portfolio paying fully franked dividends. Not enough to affect earning a full pension under the assets and income tests. Now an income survey would probably pick up the full pension, perhaps some bank interest and perhaps some dividends, providing he remembers to tell the interviewer about the latter at 88 now. Even if he does, they might miss me claiming back those franking credits for him at the end of the fin year. They’ll also likely miss the $500 one off, gratis payment from the Govt. That payment, accompanied by a letter from the Rt Hon Soc Sec Minister and his local Senator has already been administered by the public sector and all the resourcing fully accounted for in GDP. Where was his income in that? Unlike me, he then gets drivers licence,rego, gas, electricity, water and council rates discounts. All ultimately measured by GDP, including all the admin costs, yet nary a cent measured as income no doubt. Ditto his PBS medications, doctors bills, public transport subsidy, etc. Actually he had to stop driving this year and so no licence or rego discount but now he gets Taxi Subsidy vouchers, the income depending on useage. Then there’s the GDP District nurse every morning to see he doesn’t forget his medication, and the cleaning/home help to see he doesn’t clog up the Aged Care waiting lists. Five visits a week via two separate, Govt funded agencies at a pittance contribution to their real GDP costs. Some other mob took care of the grab rails and bed rails, etc previously note.

    Now the ABS collector knocks on my door wracking up her contribution to GDP and that ABS back office GDP to boot. The self-employed Observa rattles off his estimate of income, MrsO her fortnightly teacher’s pay and MsO her Austudy. Of course the self-employed O would never dream of muddling up private vs business expenses, nor taking any undisclosed cash for services rendered, let alone use any company assets for private purposes. Perish the thought! Should MsO net off Hecs from her Austudy and add on some of that GDP from that fine, venerable institution she attends? What about the $9500 in GDP from the Govt the O’s household got in subsidies for their solar power plant this year. Switching to Truenergy will gain 64c/kwhr in unmeasured income that will be GDP when passed on by Truenergy no doubt. On and on it goes as the Govt shuffles GDP and household income around in endless circles until the collected statistics become meaningless due to that old adage- Garbage in garbage out! Just like the data I supplied for the business censuses and surveys I’ve copped in the past.

  9. Oh I nearly forgot to impute my share of income from looking up the Grocery Watch website once. Wonder how much GDP that little lot cost? Can’t wait for my pay from Fuel Watch and the lad will no doubt be hanging out for that Home Savings account boost to his household income, assuming the Govt can get any financial institutions interested in the GDP side of things.

  10. “So US citizens at a minimum have lost 15% from there pay cheques in 25 years (I suspect a lot more however). This is a more important issue than beating up corporations and wealthy people and highlights our governments poor and/ or dishonest management of our economies”

    I suspect a simple comparison of house ownership rates and market penetration of various household appliances would tend to refute this.

  11. It looks like we can bring this story home to Australia. The Australian today has an article “income dropped say most earners” http://www.theaustralian.news.com.au/story/0,25197,24345929-601,00.html
    about a report from the Melbourne Institute for Applied Economic and Social Research that includes;
    From 2001-2005 the national economy grew about 10%, GDP per capita grew about 7% but only 58% of Australians recorded an income gain and the median gain was 5.2%.
    25-54 year old couples recorded the highest gains – 72.4% had income gains with a median of 13.4%.
    It was not the case that income increases were concentrated among the rich.

  12. Re Australia: A couple of years ago I compared a National Accounts measure of average household incomes with the various measures of median household income shown in the ABS income surveys. The National Accounts measure started from the NA measure of household gross income, subtracted a few items not included in household surveys (most importantly income of superannuation funds), adjusted for household size and deflated by the CPI.

    After these adjustments, the growth over the 1993-94 to 2002-03 period was slightly less for the NA mean (1.3%pa) vs the income survey median (1.5%pa). I didn’t compare against GDP.

    [Details in Saunders and Bradbury, Economic Record, September 2006, Fig 4]

  13. Anecdotally it’s easy to show measuring income is extremely problematic and for confirmation of that you only need to speak to the ATO. That said, there are enormous lies, damned lies and statistics being bandied about everywhere at the moment, to hide the awful truth. Mogambo takes up the story, in his inimitable style-

    Fixated as I am on inflation in prices because it scares The Living Hell (TLH) out of me, I was drawn to how Peter Schiff of Euro Pacific Capital was amused that the government and its minions have reported that “the GDP deflator, used in the report to downwardly adjust GDP to account for inflation, was shown at just 1.2% annualized … the lowest deflator in 10 years”, while at the same time “the latest reading on consumer prices (CPI) in the second quarter shows year-on-year inflation running at a 5.6% rate, a seventeen-year high!”

    He asks, without the slightest hint of the venomous sarcasm you would expect, “How can it be that inflation is simultaneously running at a 17-year high and a 10-year low? Welcome to the Alice in Wonderland world of government statistics.”

    But this obvious fraud and bold-faced lying does not lead me to, as you would think, a Predictable Mogambo Screeching (PMS), which unfortunately has the same acronym as Pre-Menstrual Syndrome.

    And while both PMSs have a lot of features in common, the main difference is that when I get in your face, bellowing in a loud, arrogant, irritated and irritating rant about what an idiot you are, it is only because you are not buying more gold and silver, on your way to buying more gold and silver, or just getting home after going out and buying more gold and silver.

    I note that Peter Schiff does not ascribe to the Mogambo-Scream-Loudly-Until-People-Do-What-You-Want Theory (MSLPDWYWT), probably because it has never actually worked or perhaps because he never heard of it since I just made it up, but he was intrigued that there was no response in the news media to this startling paradox about how inflation could simultaneously be at a 17-year high and a 10-year low.

    Well, the answer was that they didn’t know. And so he tried to inform them. The results were more dismal than you would think, and “Although none of the reporters we spoke with could explain why inflation could run at a 10-year low and a 17-year high at the same time, they did not deem the anomaly sufficiently noteworthy. Having been ignored by reporters, I then tried the opinion pages. Unfortunately the piece that we prepared on the subject was rejected this week by all the leading national newspapers.”

    After all these years, I have very little respect left for the various media and their execrable “journalism”, especially now that they are predictably leftist morons who are always proponents for more and more government programs and government spending, which costs so much money that so much money was created that it has now led to inflation in consumer prices being at a 17-year high, almost matched and usually exceeded everywhere in the world, too, which is beyond terrible, and true American patriots should rise up in open rebellion against the federal government and the Federal Reserve, making it easy for me to take over and begin the long-awaited Mogambo Reign Of Terror (MROT).

    Mr Schiff is not going to be drawn into a senseless fantasy about some stupid Utopian MROT, and says that the important point is that investors don’t get the real facts, and “reacting to the global economic slowdown by buying dollars and other US-based assets while selling gold, commodities, and foreign assets, are jumping out of the frying pan right into the fire. My guess is that it will not be much longer before they feel the heat.”

    Well he was right now that Wall Street has fallen 7% in the last 3 days and yesterday spot gold jumped $70US or 9% in a day, the largest one day rise in 9 years. Fiat money creation and all those who sail with it are about to meet their dreaded nemesis is my guess now.

  14. Coem back to this topic a bit because a new thought occurred to me: if capital investment is growing faster than GDP then shouldn’t returns to capital be going up as a proportion of GDP?

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