It’s a statistic that you’ve heard in one form or another: Over the last few decades, after accounting for inflation, the median income in the United States has not risen at all.
The implication is that all the productivity gains of the past number of decades have gone to the rich and not the average American.
It’s popular sentiment, resonating deeply with prevalent fears of high unemployment, income inequality, and low-cost overseas labor. The press, from The New York Times, to The Wall Street Journal, to Fox News, has worked the idea to the bone. And it’s made great political fodder, too. Entire presidential elections are framed in its terms, with every candidate working the angle that they care more about the American middle class than their opponent does.
But what you may not have heard is that the idea that the rich have gotten richer, and the not-so rich have been languishing, stagnant, or all out dying, may have turned out to be demonstrably incorrect.
It’s possible, after all, that the middle class has fully participated in all the wonderful technological and productivity gains of the last three decades. We just didn’t know how to measure it.
Households Give Better Data and a Better Outlook
A new study in the National Tax Journal by Richard Burkhauser, Jeff Larrimore, and Kosali Simon argues that the methods used to determine that productivity gains have been unequally distributed don’t properly measure the economic well-being of the middle class.
And, according to the conclusions of their study, it appears the middle class may be doing just fine.
You see, the depressing statistic about the middle class stagnancy comes primarily from the research of Thomas Piketty and Emmanuel Saez. Piketty and Saez took the sensible and direct approach of analyzing IRS tax returns to determine how middle class incomes have fared.
While they didn’t make any errors, and I don’t believe that they had any ideological agenda to advance, there are nevertheless several phenomena that cannot accurately be represented by the IRS data.
This new research ditches the IRS tax returns, and instead uses an annual data set from the Census Bureau taken each March called the Current Population Survey (CPS). This is a wide-ranging sample of data on households, including the number of people who live there, the household’s income and the forms of that income.
Now, the CPS data and the IRS data, insofar as they cover the same data points, give very similar results. For example, if you consider tax return data alone, for the period from 1979 to 2007, the CPS data would show that median income has risen only 3.2% (and that’s total change, not growing 3.2% per year), a result very similar to the IRS data.
This is important, because the IRS data verifies that the CPS data doesn’t include inherent errors based on the sampling method or questions.
But the CPS data has much more information than the IRS’s, which allows the researchers to try and measure the well-being of the middle class with greater accuracy.
You see, Piketty and Saez use what’s called a “tax unit” for its analysis. That is, each person who filed a tax return is treated as a separate income.
Burkhauser, Larrimore and Simon, however, use the household unit for analysis. That is, the combined income of all household members. Which makes sense. After all, members of a household generally benefit equally from that household’s total income.
Take a full-time college student living at home, for example. With only a few thousand dollars of income, that student appears as a very poor individual in IRS data. In reality, though, that student treated as a member of a household can hardly be considered impoverished.
Another example would be young unmarried couples who live together. While they file two separate tax returns, because their combined total incomes will be largely redistributed on an equal basis, considering them as one household would be more fitting.
The IRS data – and any conclusions based on it – ignores these considerations. The CPS data, on the other hand, provides the information necessary to more accurately reflect the reality of income distribution in the United States. And what it shows is that the median income grew by 12.5%. That’s nearly four times the growth that the IRS data suggests.
Here are a few more holes that CPS data fills in…
IRS data considers what’s called “pre-tax, pre-transfer income.” That means any changes in tax rates or transfers (government payments like welfare or Social Security) are not reflected.
And since transfer payments have risen while tax rates have dropped, leaving these out makes a significant difference.
In fact, by taking these factors into account, CPS data sends median income up to 20.2%.
Finally, over the last three decades the composition of income has changed. For example, employed people increasingly receive a decent amount of their compensation in the form of medical insurance benefits.
Since CPS also factors in the cost of those benefits, the median jumps to 27.3%…
That’s a far cry from the original figures that had so many fearing the death of the middle class.
Of course, the new study contains some estimates about the value of insurance benefits and other figures that no doubt make it imperfect. After all, no study is the last word on a subject.
Also, over the same period, GDP has grown roughly 125%, so it’s not as if the middle class is capturing all the benefits, or even the benefits it ought to be capturing.
But in the end, even if income inequality has indeed been rising, this newer, more complete data demonstrates at the very least that the imbalance isn’t as stark or damning as the older data led us to believe.
Ahead of the tape,