One of the great liberal rallying cries over the last couple of election cycles has been the issue of income inequality, frequently noted as a symptom of the evil influence of capitalism. Chief among the statistics which support this trend is the stagnation of household income. Peaking in the late 1990s before tumbling after September 11, 2001 and then again following the crash of 2007, these stagnant numbers are seen as proof that middle America simply isn’t getting the chance to get ahead.
But how real are these household income numbers? Investors Insight has an eye opening op-ed this week which asks one of those questions which should have a lot of us slapping our foreheads in a “why didn’t I think of that” moment. When we measure household incomes over time, why have we not checked to see if households are changing at the same time as we’re measuring income?
[T]here are some other very obvious, but mostly overlooked, factors that can help explain why median household income has declined over the last 15 years that have nothing to do with economic stagnation. The fact is that there have been significant demographic changes in the composition of US households…
As you can see in the chart below, real median household income has declined since 1999 and has been fairly flat over the last three years. As we all know, the US population is aging and retirees as a share of the US adult population have risen from less than 15% (left scale) in 2007 to over 16.5% today. That number will continue to increase as more Baby Boomers retire.
Since retirees, generally speaking, have less income than their working brethren, that fact alone could drive median household income lower. But that’s only one part of the problem.
The number of retirees mixed into the population is an obvious and important factor, but it’s only one of several. Remember that this statistic is tracking households, not people. What makes up a household, specifically in terms of not only the raw amount of income but the number of people living there? The report notes that marriage is on the decline and single person households are on the rise, each one reporting less income because there are less people earning.
Has the composition of households in America been changing? Obviously, it has. The percent of married couple households has fallen from more than 60 percent in 1980 to less than 50 percent in 2010. One-person households have risen from 23 percent to 27 percent of households in this period. Shifting from two-earner households to one-earner households lowers the median household income, even if everybody’s income is the same as before [or rising].”
It doesn’t end there. Old assumptions were based largely on two earner households, but in addition to single income homes, there has been an uptick in the number of no earner households.
All of these factors taken together feed into a trend where the average household income numbers will be forced downward, even if the income of the average person who is actually working is staying the same or even rising. So, in summary, the key factors here are the decline of marriage, an increase in the number of people who record no income through employment and the actually quite positive fact that people are living longer and spending more years in retirement. Until economists figure out a way to take shifting household demographics into their calculations, the “household income” statistic may remain a less reliable measuring stick than it was in years past.