Middle Class Incomes: Up, Flat, or Down?

Screenshot 2014-01-06 at 4.27.09 PMDepending on who you ask, the incomes of the American middle class over the past few decades have either a) risen only a little b) stagnated, i.e. stayed flat or c) declined. When President Obama declared in his State of the Union speech that family incomes had “barely budged” from 1979 to 2007, The Washington Post called it inaccurate, noting that median household income increased substantially over that period. And yet barely a day goes by without a story that references stagnating wages for the middle class.

So which is it?

The one thing everyone agrees on is the fact that the rich are getting richer much, much faster than anyone else. And so in one sense, it doesn’t much matter if the answer is (a), (b), or (c). In either case, rising inequality represents a gross misallocation of the nation’s wealth. Still, the possibility that the average American is worse off economically than one or two generations ago makes the issue feel all the more urgent.

Unfortunately, the seemingly simple question of whether Americans are making more money today than in decades past is a bit tricky. The answer depends on the timeframe and the measure.

Short version: The average American family was making modest gains in income over the past few decades, but was working longer hours to do it. Then the recession happened and set the average family back 10 to 20 years.

Now here’s the full story.

The easiest place to start is household “market income”, which just means how much money a household makes before taxes or government transfers are counted. (Importantly, employer-based health care benefits are included in this measure.) Here, via the Congressional Budget Office, is the snapshot over time:

market income CBO

The thing to note here is that the median household income rose nearly 20 percent between 1979 and 2007. That the mean income rose faster hints at the fact that the rich got richer at a much faster rate (see the chart at the top), but nonetheless, seen at this level the story looks like one of modest progress.

Things actually look better still when you consider the impact of taxes and transfers, shown here again via the CBO:

median after tax income CBO

Once taxes and government transfers are accounted for, the median American’s income has risen more than 30 percent from 1979 to 2007, making the story of minor progress a bit more progress-y. (It’s this after-tax measure, accounting for taxes and government transfers, that you saw in the chart of all income inequality at the top of this post.)

There’s one more upside to note: since the average household is smaller than a few decades ago, these gains are slightly larger when size of family is accounted for. Unfortunately, that’s the beginning, not the end, of the story.

It turns out that the median household’s income has only increased because that household has been working more. The New York Times summarizes data from Brookings from 1975 to 2009:

Median wages for two-parent families have grown 23 percent since 1975, after adjusting for inflation. The collective number of hours worked by both parents over the course of a year, however, has risen 26 percent. That means their wages haven’t even grown as much as their working hours would imply they should.

The increase in hours worked is largely the impact of women entering the workforce. To make that point a bit more clear, we can look at this chart from Brookings:

Screenshot 2014-01-06 at 8.23.10 PM
If modest increases in household income for the median family are the result of more hours worked, what do wages look like on an hourly basis? For that we can turn to the Economic Policy Institute:

Screenshot 2014-01-06 at 8.17.41 PM

As you can see, the story is one of stagnation since the 70’s, with a modest boost in the late 90’s. This is what stories about “stagnant wages” are talking about. The average American doesn’t make much more for his or her time than in the 1970’s. To bring in more income requires working longer hours.

But here’s where it goes from depressing to downright infuriating. That modest increase in household income that the median family earned by working longer hours? Well, not surprisingly, the Great Recession pretty much wiped it out:

 since the recession
As for the recovery? Well, in its first year, from 2009 to 2010, the top 1% captured 93% of the income gains, according to Stanford:
Screenshot 2014-01-06 at 8.34.41 PM
What about since then? According to Pew, the top 7% saw its wealth (not income) rise 28 percent from 2009 to 2011 while the bottom 93 percent of Americans saw their net worth decrease by 4 percent.
Screenshot 2014-01-06 at 8.37.45 PM

So there you have it. Wages are flat, incomes were up but only because of more hours worked, and then got hammered by the recession. If the average American family could take a time machine back to 1989 they’d make just as much money, and would work fewer hours to make it.

The typical argument as to why we can’t do anything to fix this claims that intervening would jeopardize economic growth. Even if that were true, what’s the good of growth if it doesn’t make anyone richer except the rich? And let’s be clear: that is what economic growth has done.

Here’s where income growth has gone from 1979 to 2007:

Screenshot 2014-01-06 at 8.42.00 PM

But remember: that was the pre-recession distribution. It’s only gotten worse.