Mon, Aug 03, 2015 - Page 9 News List

Are US middle-class incomes stagnating?

While some analysts argue that middle-class incomes in the US have stagnated since the 1980s, it appears the middle class has been doing much better than the statistical pessimists assert

By Martin Feldstein

The challenge of raising the incomes of middle-class families has emerged as an important focus of the presidential election campaign in the US. Everyone agrees that incomes at the top have surged ahead in recent decades, helped by soaring rewards for those with a high-tech education and rising share prices. And there is general support for improving programs — such as food stamps and means-tested retiree benefits — that help those who would otherwise be poor. However, the public debate is largely about how to help the more numerous (and politically more important) middle class.

Here, much can be done by improving existing government programs: expanding market-relevant training, increasing opportunities for married women to join or rejoin the labor force, reducing the penalties in social security rules for continued employment by older workers and changing tax rules in ways that will increase productivity and wages.

While strengthening such programs should be a high priority, we should not lose sight of how well middle-income families have actually done over the past few decades. Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains.

For example, it is frequently said that the average household income has risen only slightly, or not at all, for the past few decades. Some US census figures seem to support that conclusion. However, more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50 percent since 1980. A more appropriate adjustment for changes in the cost of living implies a substantially greater gain.

The US Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution. This is the median household income. To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes. The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10 percent, equivalent to less than 0.3 percent per year.

Any adult who was alive in the US during these three decades realizes that this number grossly understates the gains of the typical household. One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39 percent from 1985 to 2015.

The official census estimate suffers from three important problems: It fails to recognize the changing composition of the population (the household of today is quite different from the household of 30 years ago); its estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates; and the price index used by the bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.

Consider first the changing nature of households. From 1980 to 2010, the share of “households” that consisted of just a single man or woman rose from 26 percent to 33 percent, while the share that contained married couples declined from 60 percent to 50 percent.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top