Household incomes rising once more after long spell of stagnation

Wealth and Inequality

Scarcely a decade after the end of 2009’s Great Recession, the US economy is starting to improve on some fronts. With 110 consecutive months of employment growth, the labor market is setting post-WWII records. November 2019’s unemployment rate of 3.5% is a low not seen since the 1960s. Household incomes have also rebounded.

Not all economic markers are in robust shape, though. This century, household incomes have not grown strongly, and nor has household wealth achieved pre-recession levels. Economic inequality continues to worsen as the gap between rich and poor widens.

Incomes of US households have generally trended upward since 1970 allowing for the usual peaks and troughs of business cycles. In 1970, median income was $50,200 (expressed in terms of 2018 dollars) while in 2018, median household income in America was $74,600.

This overall trend disguises two episodes in the way household incomes have evolved. The first of these episodes lasted from 1970 through 2000 with the second occurring between 2000 and 2018.

The majority of these gains occurred in the last three decades of the century. From 1970 to 2000, median household income rose to $70,800, a 41% increase. From 2000 to 2018, by contrast, median income only increased by 0.3% annually. If this slowdown had not occurred and incomes had risen at the same rate as during those three decades to 2000, average American household income would now be $87,700 rather than the current level of $74,600.

This shortfall is income is largely due to two recessions in the years from 2000. The first recession lasted from March through November 2001 and was short-lived. Recovery was nevertheless sluggish. Indeed, median income levels were not restored to pre-recession levels until 2007.

In 2007, though, the Great Recession begun, delivering another harsh blow to household incomes. It took until 2015 before incomes hit pre-recession levels. In 2015, the median household income of $70,2000 was still at 2000 levels and marked a 15-year spell of stagnation, unprecedented during the previous half-century.

Viewing more recent trends in household income suggests that the impact of the Great Recession could be a thing of the past. Rising at the annual rate of 2.1% from 2015 to 2018, median household income rose to $74,600 from $70,200. This is a greater level of growth than that from 1970 to 2000, and comparable to the 1980s economic boom and the 1990s dot-com bubble.

Why does economic inequality matter?

The steep rise in economic inequality in the US is linked to several factors including:

  • Globalization
  • Technological change
  • Decline of unions
  • Eroding value of minimum wage

Regardless of the causes, the ceasless increase in inequality since 1980 is a cause for concern among politicians, members of the public, researchers, and policymakers.

The core reason for this concern is that people occupying the lower rungs of the ladder economically could experience impaired economic opportunity and diminished mobility as this inequality widens still further. This phenomenon is referenced in the Great Gatsby Curve.

Another negative impact of inequality is the way the disadvantaged are politically influenced. Others suggest that economic growth in general could be impacted.

That said, there is an alternative viewpoint positing that income inequality does not impact economic opportunity.

Other estimates of economic inequality

In this report, household incomes are estimated based on data from the CPS (Current Population Survey). This is a survey of households performed through a partnership between the Bureau of Labor Statistics and the US Census Bureau. Figures are based in pre-tax income from most sources. One key omission is the in-kind services provided by the government. Income taxes are progressive, and these in-kind services could serve to enhance the economic wellbeing of poorer Americans. For these reasons, the true gap in financial resources could be overstated.

The CBO (Congressional Budget Office) gives an alternative estimate for this income inequality accounting for federal taxes along with a broader base of in-kind services. According to the CBO estimate, the Gini coefficient in 2016 spanned from 0.595 (without taxes and transfers accounted for) through to 0.423 (with full accounting of transfers and taxed). Ranges for the Gini coefficient range from 0 (perfect equality) to 1 (complete inequality).

According to both estimates, American income inequality is shown to have increased by around 20% from 1980 through 2016.

Findings from other research indicates a similar rise in inequality however in-kind transfers are accounted for.

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