Update 203 — Median Income Hits New Record
But… Who Has Seen the Wage Gains?
The news out of the Census Bureau yesterday that median household income has reached record heights — $59K — following an average growth rate of more than four percent over 2015 and ’16 — was an unambiguously good and a posthumous prop for the economic policies of the Obama administration.
The report is certainly encouraging, but despite these gains and a near-optimal unemployment rate, wages remain puzzlingly stagnant over the same period. Meanwhile, the new record has not halted, let alone reversed, the growing inequality in the nation. When will wage growth be great again? What dynamics explain the persistence of income inequality despite nearly full employment?
We take a closer look, below.
What the Census Report Illustrates
Yesterday, the Census Bureau announced that median household income reached $59,039, its highest point ever. The report reflects a two-year period in which income growth (3.2 percent 2016 and 5.2 percent in 2015) has been relatively well distributed. This is on top of reporting that the poverty rate fell to 12.7 percent, its lowest point since the financial crisis, and the number of uninsured Americans dropped to 8.8 percent.
The report suggests that the household income increases are attributable to an increase in working hours among less-educated workers (driven in part by a transition from part-time to full-time work), which brings gains to the lower end of the income distribution. This increase also reflects gains from investment as the share of income derived from sources other than wages increased to 21.8 percent from 21.1 percent from 2015-2016, a development that largely favors households at the top of the distribution.
Household Income vs. Wage Growth
Differentiating between household income and wage growth is important for understanding the significance of the Census Bureau’s report. The difference between household income and wage growth is the difference between all income for a household in a given year — which can be derived from a variety of sources, from investments, from multiple earners, etc. — and the salary earned by an individual worker.
Last year’s household income growth figure can be attributed to the two million jobs that were added to the economy as well as the shift to full-time and year-round work. Some of these workers moved from part time to full time work. So while wage growth has been stagnant, median household income has increased by 8.5, twice as fast over the same period. To clarify:
• Household Income — Household income measures the total incomes of all members of a household. This includes salaries, wages, retirement income, government transfer payments and investment gains.
• Wage Growth — Wage growth simply refers to the increase in salaries paid to wage earners. Wage growth has been relatively flat for over a decade, although over 2016, average real hourly earnings of non-supervisory workers grew more than one percent in 2016. EPI showed that real wages grew two to three percent for low and middle-income workers.
Implications for Inequality
Income gains at the lower and middle parts of the income distribution can increase equality, but this dynamic is offset by significant gains at the top end of the distribution. While the median income grew an average of 4.2 percent over the last two years the share of income earned by the bottom three quintiles did not change. In fact, in the last decade, the bottom 20 percent of earners’ income decreased by $571 while the top 20 percent saw income gains of $13,479.
As mentioned above, lower- and middle-class workers in the U.S. are working more hours to meet increased expenses such as childcare. In contrast, upper-income taxpayers realized much of their gains through investment income. This explains the new median income record more than the unemployment rate does.
• … for Monetary Policy?
The Fed has been concerned about the slow inflation increases in regards to their plan to increase interest rates. As they have been looking primarily at wage growth — and none is evident from the Census Bureau report — it’s important to understand that this report will not go far in easing their concerns. Highly unequal gains in income and stagnant wage increases with low and slow inflation will likely continue to give Yellen pause for now.
• … for Tax Reform?
Pres. Trump may have more to thank Pres. Obama for than he realizes. With more income in the pockets of American households, the government may be able to count on more revenue than expected. This revenue does not stem from wage growth but from an increased in the number of taxable work hours by wage earners (as workers are working more hours). Just how much revenue remains to be seen, and whether or not it will be anywhere near sufficient to fund the president’s tax cuts is another matter entirely.
Good Economic News and Inequality
Unambiguously, an increase in median household income is good news for the middle class. But note that wage growth remains puzzlingly low given the tightness of the labor market and significant inequality persists.
Generally, labor market gaps between more advantaged and less advantaged workers narrow when the economy is doing well because employers have fewer hiring options. Yet despite the real gains from the post-2008 recovery this does not appear to be the case. This suggests that other factors, such as the erosion of worker negotiating position, increased capital substitution, and the decline of organized labor, explain stagnant wages.