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.
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.
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.