Where has US household income gone ?

How much income, exactly (or roughly), is missing?

You can convert company income into capital gains? Sounds like a great swindle.

HH size hasn’t shrunk much, but it matters how its shrinking. Mom’s still home and the kids, but Dad’s not sticking around. The number of children (age 0-16) living in households without a father (or stepfather) went from about 11% in 1960 to 29% in 2005. (source: IPUMS)

Don’t forget that household income should have expandedas vast numbers of women entered the workforce.

Is net increase in debt (federal, local, personal, business) a factor here? I am not 100% on how GDP is calculated, but my understanding is that government spending and personal consumption are included, so for example the $680b increase in the national debt in the last year at federal level alone could account for over $2k per capita difference.

This is something of a guess….it may or may not fill the whole gap but it will certainly fill some of it.

From the Census guys. pg 3

http://www.census.gov/prod/2008pubs/p60-235.pdf

The Census Bureau recognizes that
measuring money income may not
completely capture the economic wellbeing
of individuals and families.4
Families and individuals also derive
economic well-being from noncash
benefits, such as food stamps and
housing subsidies, and they have
reductions in disposable income due
to taxes. While the income and
poverty estimates shown in this report
are based solely on money income
before taxes and do not include the
value of noncash benefits, the Census
Bureau computes a number of alternative
measures of income and poverty
that do attempt to account for those
factors.

What I take from that is that the numbers being used for real household income are not in fact real household income. They are real household money income. So employer provided health care (a substantial portion of compensation I think?) is not included in the given figures. Very roughly, if 13% of GDP is health care and 50% of that comes from the Govt (Medi-care and -aid) and the other 6.5% of GDP is employer provided then we’ve got some of the gap.

The other part is that well known problem with the way poverty statistics are calculated in the US. It is cash market income, leaving out anything provided in kind (Medicaid or care, so that’s another chunk of that 13% of GDP which is health care, housing vouchers, food stamps) or through the tax system (the EITC).

I’m sure I’ve garbled bits of the above but I would say that at least some of the gap JQ is puzzling over is that the Census is not measuring “total” household income but only cash household income, leaving out all benefits in kind, like health care, and such things as the EITC.

I’ve no idea whether that is enough to explain the whole gap.

Saudi Arabia?

GDP is computed by adding up all the expenditures by people, businesses and government. Accountant’s would consider these to be debits. Household income is the other side of the accountant’s model and is classed as a credit. The difference between the debits and credits is our missing number and it also must be a credit. The biggest missing credit that I can see is profits that were retained by corporations and not distributed to the shareholders.

There is probably an economist somewhere that has written a paper on this issue and it certainly would be an interesting read.

Peggy @7 makes a very interesting point.

Apparently 59% of women participated in the labor force in 2004 (73% of men). If the figure in ’65 was a lot lower, say 19% (I have no idea how close that is). If all men and women live in 1-man-1-woman-households (which they don’t, of course) then, if income per job stayed the same, household income should have increased by 50% just from women entering the workforce.

That Medicare is definitely included into GDP figures, but isn’t included as part of household income.

Let’s say the government is A, the Medicare consumer is B and the doctor is C. The visit is $100.

You’re saying that it should be recorded as A transferring $100 to B and then B transferring $100 to C. You believe that this thing will be counted as $200 in the GDP book, but as only $100 in the Income book.

What I’m saying is that, perhaps, for the purposes of both GDP and Income accounting this is recorded as simply A transferring $100 to C. In which case this shouldn’t create any discrepancy – it’s counted as $100 in both books. I could be wrong, of course, I’m just guessing.

I caught this fragment from Dean Bakers blogspot once — it is my main informant of where the income went:

Dean Baker * (in 18th reply on his blog post) reproduced what he called “a slightly altered table from Gordon’s ** paper, showing income shares in 1972 and 2001” — my percentage changes on the right.

0-20_______2.6%, _ 2.0%________- .6%__ -12.3%
20-50____ 16.0%, _ 11.7%_______ -4.3%__ -11.7%
50-80____ 33.7%, _ 27.2%_______-6.5%____ -7.4%
80-90____ 17.0%,_ 16.1%________ – .9%___ –
*********************************************
90-95____ 10.8%,_ 11.3%______ +_ .5% __+
95-99.0___12.2%,_ 14.8%______ +2.6% ___+ 3.1%
99.0-99.9__ 5.7%,__ 9.6%_______+3.9% ___+ 7.0%
99.9 -100__ 1.9%,__ 7.3%_______ +5.4%__ +12.4%

(see p. 84 of Gordon** for similar breakdown of wage income)

4.9% loss of overall share meant 26.3% cut of 0-50 percentile share.
6.4% loss of overall share meant 14.5% cut of 50-90 percentile share.

Why did it happen — as opposed to where did it go?

Lower 90 percentile earners allowed their bargaining power slip through complacency. We had a much happier nineteenth labor history on this side of the Atlantic — recent unhappiness blamed on the “great compression” — more recent happiness taken for granted as productivity boomed for decades (as long as everyone is making money, there was no big pressure on the bottom) and the post compression winners and losers had not yet sorted themselves out (fewer winners to beat up on losers).

Meanwhile the American labor majority let their bargaining power slip…
…today’s underpowered remedial proposals, inadequate even in earlier times and poorer places — Obama’s $1 short of LBJ’s minimum wage proposal and the 1930s card check retread (instead of modern sector-wide labor agreements as practiced in third, second as well as first world economies) — illustrate the depth of the trench into which today’s labor has let itself fall…

…while the top utilized their bargaining power like never before.

All of which resulted in a very finite shift of 12.5% (as of 2001 — not a good year for top few percentile incomes according to Dean Baker) from the bottom 90 percentile to the top 3%. If you squeeze a toothpaste tube from the bottom up, it all comes out the top.

Since the top 3 percentile have always been highly educated we can assume it is not the bottom 90 percentile falling behind educationally that is at fault here.

Elizabeth Warren explains it all. Technically, I suppose she’s answering a different question than the one John Quiggin poses; but the first ten minutes or so of the linked lecture are really dynamite.

referencing comment 7 and 16:
I have often wondered if the huge number of women entering the workforce have actually had almost no effect on total household incomes. If labour was priced at a certain level, then an increase in available labour (all those women entering the workforce) would lower the price. In short, more work is being done by more people, but at a lower price. so where you had one wage earner in 1950, now you have two in 2008. But instead of now having two full incomes, you have maybe 1.2, because not only do women earn less in the first place (as has been frequently documented) but all that extra labour in the market has caused the price of labour to drop in real terms.

If anyone could point me at actual work done by actual economists in this area, I would be grateful.

Also note the recent discussion at Big Picture which describes the large difference in Q2 between real GDP and income caused by the absurd action of the GDP deflator, which actually grows smaller with the rise in imported oil.

Wouldn’t an important data set here be the rate of foreign investment in U.S. securities during this period (perhaps with associated data like dividend payments and stock buy-backs)?

It wouldn’t cover all your gap, but if there was a lot of increased foreign investment–especially in blue-chip, divident-paying companies or in companies that participated in significant stock buy-backs–that could account for a rise in GDP that was not matched by a rise in household wealth (especially since the productivity gains have come nowhere close to trickling down to wages, proportionally).

You are merely describing the rise in per worker productivity.

We produce ever more with technology (machines…. from robots to computers to giant farm equipment)

That’s really all it is.

eg If one man can produce twice the widgets today than he could so many years ago but his pay rises only 30% we calculate that as a productivity gain…..

Folks,

This is no mystery, just basic national income math. It turns out that there are four factors that entirely account for the schism between median household income and per-capita GDP. However, let’s start with the basics. From 1967 to 2007 per-capita GDP rose by a factor of 2.1757 (117.57%). Over the same period median household income rose by a factor of 1.2956 (29.56%). The four factors are:

1. The ratio of Net National Income to GDP has fallen by 1.59% or an adjustment factor 0.984096. The main reason is faster depreciation of capital goods (PCs and the like).

2. The CPI-U-RS (used to deflate household incomes) has risen considerably faster than the GDP deflator. The primary reason is that the GDP deflator includes many goods that consumers never buy (capital goods). These have fallen in price relative to consumer goods over the years (housing, medical care, etc.). The shift is 7.62% of an adjustment factor of 0.92376.

3. Median household size has fallen from 3.268 in 1967 to 2.586 in 2007. This is an adjustment factor of 0.7915.

4. The ratio of the median household income to the mean household income has fallen by 16.9%. This is an adjustment factor of 0.83099.

If you multiply the four adjust factors, you get a total adjustment factor of 0.5979. Multiplying the total adjust factor times the growth in per-capita GDP gives almost the exact change in median family income over the period in question.

I think most folks know about the fall in median household size and the increase in the mean to median household income ratio. However, the faster growth in the CPI-U-RS versus GDP deflator is probably less known. The shift in the ratio of NNI to GDP is obscure.

John,

First, since we are talking about median household income as opposed to average household income, that would remove some of the mystery. According to the same Wikipedia article, total household income in the top quintile looks to have almost doubled, in the second it has gone up about 60% while in the middle quintile it has gone up about 35% and in the bottom two quintiles it has flatlined. Since the top two quintiles represent the lion’s share of the income, and since median income probably tracks pretty close to the middle quintile, it looks like total household income has gone up at a much higher rate than median household income. So perhaps this means businesses are using that increased income, as measured by GDP growth, to pay much higher salaries to the their top wage-earners, and not so much more to the middle and bottom wage-earners.

But more importantly, even if we were talking about average household income, not median, it would be a simple fallacy to expect that income number to rise at the same rate as GDP. It is easier to make the point if we look at individual income as opposed to household income. As you say, GDP has almost doubled since 1965. If the population had remained constant during that time, then we would expect individual income to double as well. But if the population had doubled during that time, we would expect household income to have remained constant: the overall growth in the economy would then be due entirely to more workers, not more productivity per worker.

But, in fact, it looks like the US population is about now 1.55 times the size of the population in 1965. Thus dividing the doubled GDP into the smaller growth in population, we get 2/1.55 or 1.33. So, we would expect individual incomes to have gone up by about 33% – not far from the 30% you found.

Oops. Screw my above comment. I didn’t see you were looking at GDP per person, John, not GDP. So my last two paragraphs don’t apply.

As others have said, what about health care and other benefits? Household income only measures cash payments, right? If businesses have shifted a lot of their compensation from salaries to benefits, that would mean that increases in monetary income might not match increases in overall compensation.

Coming in late, but it really astonishes and infuriates me that a question as important as this one, the big political story of the last decade or two as far as I am concerned, is still only in the early stages of analysis.

Brad DeLong and Paul Krugman have been talking now and then for several years about the paradox of a jobless recovery, or the paradox of flat wages and rising productivity, but they speak of it as a baffling mystery and go on to other things that they’re more interested in and better able to handle. And they’re the liberals.

Instead we get debates about whether offshoring and immigration have had a very slight negative effect on American labor, or no negative effects at all. from the liberals.

It seems to me that for the last five years ago this problem should have been at the top of the agenda, in screaming red letters, for all non-Republican economists. But it’s been on the back burner, by and large.

I’m regarded as a troll around here regarding economics, and an ignorant one because I don’t understand economics from the inside, and for that reason I don’t post here much any more on that topic, but looking at economics from the outside, judging it by its fruits, it still seems to me to be a crippled science with a nasty rightward bias.

The CPI/GDP deflator issue has been popping up as an issue for over a decade now, since the productivity growth/wage growth differential first showed up in the 90s. Economists have paid some attention to it, but not enough. Here’s Menzie Chinn on recent divergence:

http://www.econbrowser.com/archives/2008/08/is_the_gdp_defl.html

Denis Drew,

Yes, it does. Income inequality in 1967 or 2007 shows up as a higher mean household income versus median household income. Note that this ratio has risen by 20.34% over the period in question.

Since incomes were not evenly distributed in 1967, the 20.34% is an increase from the 1967 level of inequality to the 2007 level of inequality in household incomes.

However…

The changing mean to mean household income ratio is not the only, or even the best measure of income inequality. Far from it.

I recommend the household and family Gini’s if only because they are accepted standard. Note that the family and household Gini’s have risen considerably as well.

Note that median household income did rise by 29.56% (at least if you deflate nominal household income using the CPI-U-RS).

To reiterate posts 26 and 35, Elizabeth Warren’s work lays this out very clearly. Household income has disappeared because unavoidable expenses (e.g. health care, food and education) have risen faster then incomes.

Fiftieth comment and no one has mentioned real estate?

Back in the late 70’s real estate started getting more expensive and women had to work in order for a family to be able to afford a house. Household income went up because more people were working. Eventually productivity rose, due at least in part to increasing computer use, GDP rose, and working people didn’t get to share because, among other things, we had Republicans in power to make sure that the wealthiest got to skim the cream.

gandhi,
I’M SO GLAD YOU ASKED. Here is my sidelined cabdriver megalomaniac plan. Thing is, if an old high school educated cabbie can hatch a reasonable sounding bounce back program out for pretty much boiler plate concepts (no mission from Mars or Marx stuff) — every economic professional out there ought to have one (or more) comprehensive plans of their own.
*******************************
How to legislatively (re)impose a fair and balanced American labor market:
First, double the minimum wage to $13/hr over three years (a dollar every six months?) – and – legally guarantee inflation adjustments for incomes under $100,000.

Doubling the minimum wage could potentially add an average 50% more pay to below 50 percentile earnings ($13/hr being today’s 35 percentile wage) – accompanied by only (an easily computed) 3%* direct price increases plus perhaps (?) 3% more after other wages are pushed up – a minimum wage-force multiplier.

Next, legislatively introduce French-Canadian style (lite) sector-wide labor agreements to the US labor market (airline and supermarket employees would kill for sector-wide contracts) – and – legally mandate union certification and re-certification elections (every four years?) at every work place (periodic re-certification could clean up the most common objections to unions: entrenched, complacent or even corrupt leaderships).

Top 10 percentile incomes enjoy 40 percent of the take these days (up from 27.5% in 1973) – plenty of headroom there for the mid 50-90 percentile to rake back more missing share points through higher labor prices – a collective bargaining-force multiplier.

Finally, (at least temporarily?) hike marginal tax rates (75% over $500,000, $1,000,000?). Folks earning 2500% more than folks doing the same work 25-35 years ago will not return all the way to earth through 12.5-25% price increases – erode a force multiplier.

America’s lower 90 percentile earners never think to impose legislative hegemony to recoup the 12.5%** income share they have lost to top 3 percentile since 1973 – their unemployed force multiplier.

* http://ontodayspagelinks.blogspot.com/2008/08/3-cost-of-gdp-output-and-inflation.html
** http://ontodayspagelinks.blogspot.com/2008/08/income-share.html

Oh, sure. Let’s raise taxes on the most productive (in terms of wealth generating) citizens. Even though income has risen faster on the top, the reason it has risen at all on the bottom is because of the actions taken by our most productive members.

It’s unfortunate that people think that income equality would raise the poor up when in reality, it often just drags the rich down.

A marginal income tax of 75% on the top would just mean that the top earners would devote their time to tax avoidance rather than engage in wealth building activities.

The cons of wealth equality are so much greater than the anticipated benefits.

It may be a problem in Sherwood, but it’s hardly a problem for the US of A, which just weeks ago forced the UBS to completely terminate their off-shore services for the US clients. Just like that, and they didn’t even have to bomb Zurich once.

A marginal income tax of 75% on the top would just mean that the top earners would devote their time to tax avoidance rather than engage in wealth building activities.

These extremely greedy people who really-really need to be making tens of millions of dollars every year, these freaks – I’d strongly prefer that they become criminals, bank robbers – rather than captains of industry.

apt moniker

I don’t think so. This commenter said:

A marginal income tax of 75% on the top would just mean that the top earners would devote their time to tax avoidance rather than engage in wealth building activities.

Now, think about it, take The Fountainhead, for example. The moral of this (very naive) story is exactly the opposite: the protagonist guy wants, above all, to build his buildings – while not caring at all about the money. It’s precisely the bad, contemptible guy who’s preoccupied with making money and would probably devote his time to tax avoidance.

See? They don’t even understand their own prophet and desecrate her name. Sad, very sad.

aynrand,

We had much greater income and GDP growth when there was much greater equality. For an explanation why, please see my posts:

http://richardhserlin.blogspot.com/2008/08/dollar-spent-on-tax-cuts-costs-more.html

and

http://richardhserlin.blogspot.com/2008/08/more-on-tax-cuts-pun-intended.html

To whet your appetite, here’s part of the reason why:

Finally, what about Republican claims that tax cuts will make people work more hours because it increases their pay per hour? First, people today, by and large, work so hard, and spend so little time with their families by historical standards and compared to people in other countries, that it’s not at all clear that this is desirable, and it’s not even physically possible to work many more hours at this point. In addition, there is a point where production is decreased from more hours, because eventually it really hurts the quality of work. People become tired and burnt out. Competence and creativity is hurt. But aside from any of this, it has been shown in economics that in fact there is little long term relationship between tax rates and work hours. For most of the 20th century real wages per hour went up greatly at the same time that hours worked dropped. There’s little long term effect, and what effect there is can easily go in the other direction. Cutting taxes can decrease work hours. A key reason is the long ago established and accepted in economics, income and substitution effects, which you can find in any university microeconomics text.

The idea is this: if you raise someone’s wage from $8/hour to $12, they may go from 40 hours/week to 45, because they get $4 more for giving up an hour; that’s the substitution effect. But if you raise their wage from $8/hour to $1 million/hour, they will probably work like 40 hours per year! And then spend the rest of the year enjoying all of that money. That’s the income effect. When you raise someone’s wage per hour, they don’t have to work as many hours to live in a way that they consider well. Empirically, it appears that with taxes at about their current level, the income effect becomes greater at about the middle class level, and then we get what’s called a backward bend to the labor supply curve. Cornell economist Robert Frank has a nice brief New York Times Economics Scene article explaining all of this, “In the Real World of Work and Wages, Trickle-Down Theories Don’t Hold Up” (at: http://www.nytimes.com/2007/04/12/business/12scene.html?ex=1334030400&en=a58a714793b92179&ei=5124&partner=permalink&exprod=permalink).