Discussion: (21 comments)
Comments are closed.
A public policy blog from AEI
View related content: Carpe Diem
How much did real US median income grow in the 28 years between from 1979 to 2007? Well, a lot depends on how what measure of income we are using, as Greg Mankiw points out in a post on his blog this week “On Measuring Changes in Income.” Based on a 2011 NBER working paper by Richard V. Burkhauser, Jeff Larrimore, Kosali I. Simon titled “A “Second Opinion” on the Economic Health of the American Middle Class” Professor Mankiw summarizes some of the paper’s main conclusions (illustrated graphically above, emphasis mine below):
The median income data [often cited] are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance.
Does this matter? Yes! Here are some numbers from the Burkhauser paper:
1. From 1979 to 2007, median real income as measured by pre-tax, pre-transfer cash income of tax units rose by only 3.2%. That is a paltry amount for such a long period. You might conclude that middle class incomes have been stagnant. But wait.
2. Households are more important than tax units. Two married people are one tax unit, whereas a couple shacked up are two tax units. We would not want to treat the movement from marriage to shacking up as a drop in income. If we look at households rather than tax units, that meager 3.2% rises to a bit more respectable 12.5%.
3. Now consider government transfer payments. If we add those in, that 12.5% number becomes an even better 15.2%.
4. What about taxes? The middle class received some tax cuts during that period. Factoring taxes in, the 15.2% figure rises to 20.2%.
5. But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2% to 29.3%.
6. There is still one thing left: employer-provided health insurance, an important fringe benefit that has grown in importance. Adding an estimate of that into income raises the 29.3% figure to 36.7%.
Bottom Line: During this period, has the middle class experienced stagnant real income (a mere 3.2% increase) or significant gains (a 36.7% increase)? It depends on which measure of income you look at. It seems clear to me that the latter measure is more relevant, but the former measure of income often gets more attention than it deserves.
Take this as a cautionary tale. When people talk about changes in income over time, make sure you know what measure of income they are citing.
Comments are closed.
1789 Massachusetts Avenue, NW, Washington, DC 20036
© 2017 American Enterprise Institute