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Poor and Middle Class Incomes Have Increased Significantly

November 13, 2013

By Scott Winship

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To judge from the doomsaying that dominates public discussion of the economy, since the 1970s poor and middle-class households have seen practically no improvement in living standards. The widely-cited Economic Policy Institute, for instance, says median household income was just 5 percent higher in 2012 than in 1979 and that the poverty rate rose from 11.7 percent to 15.0 percent. Figures from the Center on Budget and Policy Priority’s Jared Bernstein also show little to no income growth for either the poor or the middle class.

But these worrying conclusions flow from problematic analyses. Contrary to conventional wisdom, poor and middle class households are at least 30 percent richer today than their counterparts from 35 years ago.

Most analysts of income trends simply accept that the official Census Bureau figures are the best available. But those figures have three important shortcomings. First, they rely on an inferior way of accounting for changes in the cost of living. The best set of inflation estimates developed by the Bureau of Labor Statistics only goes back to 1999, so it cannot be used to consider long-term income trends. However, a similar set of estimates from the Bureau of Economic Analysis is available back to the 1920s and indicates the same change in the cost of living after 1999 as the BLS series.

Using this more sophisticated cost-of-living adjustment, which is preferred by the Congressional Budget Office and Federal Reserve Board, the increase in median household income was not 5 percent but 16 percent from 1979 to 2012. In 2007, like 1979 a peak in the business cycle, median income as defined by the Census Bureau was 25 percent higher than in 1979.

Similarly, the official Census Bureau figures indicate that the household at the 20th percentile of income—poorer than 80 percent of households and richer than only 20 percent of them—was no better off in 2012 than in 1979. Switching to the better cost-of-living adjustment, however, shows a 10 percent improvement—and a 19 percent improvement comparing the 1979 peak to the 2007 peak.

The Census Bureau narrowly defines income to exclude the non-cash benefits that constitute an important part of the safety net, as well as employer-provided fringe benefits. That means it assumes that food stamps, Medicaid, Medicare, and employer-provided health insurance have no value to families trying to pay their bills and live more comfortably. For that matter, it considers income before taxes are deducted, missing any increase in disposable income that declining taxes may have yielded.

From 1979 to 2007, median pre-tax income defined to include non-cash benefits rose by about 30 percent. I find about the same increase for median post-tax income, but my estimates do not account for tax credits. The Congressional Budget Office reports a 33 percent increase in pre-tax income and a 42 percent increase in post-tax income. At the 20th percentile, pre-tax income rose by 26 to 38 percent, depending on how Medicare and Medicaid are valued. The truth is almost surely somewhere in the middle. The post-tax increase was similar.

Finally, the Census Bureau figures do not account for the fact that households have become smaller over time. When households have fewer mouths to feed, a given amount of income goes a longer way, so even if incomes had not grown, Americans would have been better off.

After adjusting for household size, median pre-tax income was about 40 percent higher in 2007 than in 1979, and according to CBO, post-tax income was 49 percent higher. At the 20th percentile, size-adjusted household income rose by 28 to 46 percent (with the health insurance valuation much more consequential than the inclusion of taxes).

These are sizable gains over time—just not as large as those experienced in the “Golden Age” of the 1950s and 1960s or as substantial as those seen at the top of the income distribution. I have focused on 1979 to 2007 trends because both years were business cycle peaks. Incomes fell after 2007, but the post-tax and -transfer incomes of the poor and middle class have recovered to their 2007 peaks today.

While incomes would be lower today than in 2007 if not for the safety net, the same is not true comparing 2007 to 1979. Median household income before taxes and transfers grew at least 20 percent. Even at the 20th percentile, pre-tax and -transfer incomes were higher in 2007 by 12 percent.

It is often claimed that median incomes would have fallen if not for the increase in work among wives. It is certainly the case that men’s earnings have grown less than household incomes have. However, claims that median male earnings have declined since 1979 must rely on methodological decisions I have shown elsewhere to be inappropriate.

More to the point, the Bureau of Labor Statistic’s Current Population Survey trends for households broken down by the marital status of the head all show sizable median income gains without any household-size adjustments. For example, from 1979 to 2007, median pre-tax, post-transfer income rose 29 percent among households with a never-married male head—no less than the 30 percent increase among all households.

The Census Bureau publishes its figures under a number of budget, time, and political constraints and with an eye toward historical consistency; it is not attempting to “skew” the picture in a particular way. It is certainly easier for analysts to pull the Census Bureau numbers from its website than to delve into the microdata it publishes or to reconcile the estimates against those from other sources like the CBO. But policymakers need the best and most accurate information from income researchers, not a regurgitation of the information that happens to be the most readily available.

Original Source: http://www.economics21.org/commentary/poor-and-middle-class-incomes-have-increased-significantly

 

 
 
 

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