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Friday, September 14, 2018

America’s Record Middle-Class Earnings Exposes the ‘Imaginary Hobgoblin’ of Income Inequality

Americans are, by and large, more prosperous than they've ever been without being noticeably less equal.

The Census Bureau released its annual report today on “Income and Poverty in the United States: 2017” with lots of new, updated data on household and family incomes, and household demographics through 2017. Below are four charts with commentary based on the new Census data on household income through 2017. Shortly, I’ll post my annual analysis “Explaining US income inequality by household demographics;” here’s my post from a year ago for 2016 data.

1. Median and Average Household Income, and Average Household Size

The chart above shows: a) average annual household income in 2017 dollars (light blue line), b) median household income in 2017 dollars (dark blue line), and c) average household size (brown line), all from 1975 to 2017.

Median household income last year of $61,372 was an increase of 1.8% from 2016 and brought median income for US households to the highest level ever, above the previous record level last year of $60,309. The income gain last year was the fifth consecutive annual increase in real median household income starting in 2013, following five consecutive declines from 2008 to 2012 due to the effects of the Great Recession. The last period of four consecutive gains in annual median household income was during the late 1990s at the end of the longest economic expansion in US history (120 months from March 1991 to March 2001).

That $12,000 annual increase in real household income translates into a much higher standard of living for the average American.

Although it doesn’t get as much attention as median income because it’s influenced by outliers on the high-end, average household income also increased to a new record level last year of $86,220, which was an increase of 1.5% from 2016 and the seventh consecutive annual increase starting in 2011.

Also notable is the fact that the average size of US households has been falling steadily for the last 70 years (or more) and was 2.54 persons in 2017, up slightly from 2.53 persons in 2016, a record low. The 2.54 average members per household last year was down by 0.50 persons from the 2.94 average in 1975 and down by more than one full person since the 3.56 average persons per household in 1947 (not shown above).

Income adjusted for household size is calculated and presented below, but it should be obvious that a comparison of median household incomes over time is distorted because the average size of US households has been declining. It’s almost important to note that the typical US household in 2017 had an annual income of $12,464 more (in 2017 dollars) than the typical household in 1975—that’s more than $1,000 in additional income every month for the typical household today compared to 42 years ago.

And when you consider that the cost of most manufactured goods and many services including clothing, footwear, appliances, electronics, TVs, household furnishings, sporting goods, airline travel, telephone service, computers, and automobiles have become cheaper and more affordable over time (relative to increases in overall consumer prices and incomes), along with the increased availability of services that are now almost free (GPS, music, cameras, Craigslist listings, Wikipedia information, Facebook, Twitter, blogs, etc.), that $12,000 annual increase in real household income since 1975 translates into a much higher standard of living for the average American today compared to a generation ago.

2. Average and Median Income per Household Member

The chart above displays average and median household income adjusted for household size. Both the average and median income per person in the US reached all-time highs in 2017 of nearly $34,000 (in 2017 dollars) for average income per person, and $24,160 for median income per household member last year. Compared to 1975, the average household income per US household member has increased by 74% from $19,500 to $34,000, while the median household income per person has increased by 45% from $16,600 to $24,160.

Without adjusting for household size, average household income increased by only 50% since 1975 (vs. 74% adjusted for average household size) and median income increased only 25% (vs. 45%), demonstrating the importance of adjusting for changes in household size when comparing median household incomes over time.

3. Married 2-Earner Households

The chart above shows annual median income from 1949 to 2017 for families headed by married couples with both spouses working. Income for a typical family in this group reached an all-time high last year of $111,000, and the median family income for this group of Americans has been above $100,000 (in 2017 dollars) for the last five years. Since 1949, the real inflation-adjusted median income for married couples with two earners has more than tripled (from $34,800) and since 1963 has more than doubled (from $54,700).

4. What Rising Income Inequality?

We hear all the time about “rising income inequality” in America (there are more than 100,000 Google search results for that term), about “the rich getting richer and the poor getting poorer,” the “stagnant or disappearing middle class,” all of the recent income gains going to the rich,” the lack of income mobility and other narratives of pessimism. In a December 2013 speech, President Obama described rising income inequality as the “defining challenge of our time” and promised that for the rest of his presidency, he and his administration would focus all of their efforts to stop the increase in income inequality. And yet, the data in today’s Census Bureau tell a much different story.

A more accurate description of income inequality in the US would be to say that it has been remarkably stable for the last 25 years.

1. The top chart above shows the shares of total income earned by the top 20% and top 5% of US households from 1993 to 2017. In 1993, 48.9% of total income went to the top quintile of US households, and 24 years later in 2017, the share of income going to the top 20% of households has increased to only 51.5%. Likewise, in 1993 the share of total income going to the top 5% of US households was 21.0%, and that share had increased to only 22.3% last year. Interestingly, the 22.3% share of income earned by the top 5% of households last year was lower than the share that group earned in 2016 (22.6%) and 2001 (22.4%), and the same as in 2006, 2011, and 2012. Over the last two decades, the income shares of the top 20% and top 5% have been remarkably stable at about 49-51.5% and 21-22.6% respectively, and there has been no statistical evidence of significant “rising income inequality” according to these measures.

2. The bottom chart above shows the annual Gini index of income inequality (a statistical measure of income dispersion that quantifies income inequality on a range from 0.0 for complete equality to 1.0 for complete inequality) for US households from 1993 to 2017. Like the first two measures above, the Gini index measure of income dispersion reveals that there has been no significant trend of “rising income inequality” for US household incomes over the last quarter century. The Gini index in 1993 was 0.454 and last year it was 0.482, the same as in 2013, and this statistical measure of income inequality has also shown remarkable stability for the last several decades in a narrow range between 0.46 and 0.48.

Whether we look at Census Bureau data on the share of total income going to the top fifth and top 5% of American households, or Census data on Gini coefficients for US household income, there is very little statistical support for the commonly held view by the public, academia, and the mainstream media that income inequality has been rising in recent years or decades. A more accurate description of income inequality over the last several decades in the US would be to say that it has been remarkably stable for the last 25 years starting about 1993.

So why are we having a national debate about solutions to the non-problem of rising income inequality that doesn’t even exist according to several standard Census Bureau measures? Maybe it’s another example of what H.L. Mencken called an “imaginary hobgoblin”:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

5. The Disappearing Middle Class?

The chart above represents what might be one of the most important findings in the new Census data and confirms a trend I’ve highlighted many times before. Yes, the “middle-class is disappearing” as we hear all the time, but it’s because middle-income households in the US are gradually moving up to higher income groups, and not down into lower-income groups.

In 1967, only 9% of US households (only 1 in 11) earned $100,000 or more (in 2017 dollars). Last year, more than 1 in 4 US households (29.2%) were in that high-income category, a new record high. In other words, over the last half-century, the share of US households earning incomes of $100,000 or more (in 2017 dollars) has more than tripled! At the same time, the share of middle-income households earning $35,000 to $100,000 (in 2017 dollars) has decreased over time, from more than half of US households in 1967 (53.8%) to less than half (only 41.3%) in 2017. Likewise, the share of low-income households earning $35,000 or less (in 2017 dollars) has decreased from more than one-third of households in 1967 (37.2%) to below one-third of US households last year (29.5%), a near-record low.

Bottom Line

Here are some of the key takeaways from the new Census report on US incomes through 2017:

  • The 1.8% gain in real median US household income last year brought median income to more than $61,000, the highest level ever recorded.
  • The income gain in 2017 was the fifth annual increase and the first period of five consecutive increases in median household income since the late 1990s.
  • Compared to 1975, the typical US household today has $12,464 more annual income (in 2017 dollars) or more than $1,200 more per month in real, inflation-adjusted dollars to spend on goods and services, many of which have become much more affordable today than in the 1970s (or weren’t even available then).
  • Adjusted for household size, which has been falling over time, real median household income per household member last year of $24,160 (in 2017 dollars) was the highest in history.
  • Real median income for married couples with both spouses working reached a new all-time record high last year of $111,000 and has more than doubled from $54,700 in 1963.
  • By three different measures—income shares of the top 5% and 20% and the Gini coefficient—there is no evidence of a significant rise in income inequality over the last 25 years; all three measures have been remarkably flat for more than two decades.
  • The share of US households with incomes of $100,000 or more (in 2017 dollars) reached a new record high of 29.2% last year, which is more than triple the share of households in 1967 with that level of income. At the same time, the share of US low-income households (real incomes of $35,000 or below) fell to a near-record low of 29.5%.
  • America’s middle-class is disappearing but into higher, not lower, income categories over time.

This article is reprinted with permission from the American Enterprise Institute.

  • Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.