The myth of stagnant income

Many economists, journalists, business leaders, and elected leaders of both parties believe that for a large portion of households, inflation-adjusted real income has not increased for decades. But new data from an independent, nonpartisan arbitrator shows that what everyone seems to know is not so.

WASHINGTON, DC – It is often taken for granted that income inequality and stagnation are a major and growing threat to the achievement of shared prosperity in the United States. Many economists, journalists, business leaders, and political leaders (both Republican and Democratic) believe that for a significant proportion of American families, real income (after adjusting for inflation) has been stagnant for decades, and that income inequality (the difference between families with more and less income) has grown substantially in recent years.

But a simple observation can undermine the credibility of the claim that revenues have been stagnant for decades. Just compare what a typical household consumes in 2022 with what it consumed, say, in 1992. Advances in healthcare, safer cars, the spread of the smartphone, video calls with friends and family, better quality appliances are just a few examples of the considerable improvements in consumption achieved in these decades. Could this material progress really have coincided with stagnant income?

Intuition and anecdotal knowledge can sometimes be used to estimate economic trends, but they can also be misleading. Happily, to clarify the issue, we can turn to the statistics published last month by the US Congressional Budget Office (OPC) (a non-partisan body that acts as an arbiter of economic policy debates in the country). They confirm that what is often taken for granted is wrong.

According to the OPC, the median income derived from the market (labor, business and capital, as well as the collection of pensions for services provided in the past) did not stagnate between 1990 and 2019, but rather grew 26% in real terms. This coincides with the growth of wages. By my own calculations, based on data from the US Bureau of Labor Statistics (BLS), the average real wage for workers without supervisory roles increased by about a third in that period.

In addition, a more complete indicator of the financial resources available for household consumption and savings is one that takes into account non-market income and tax payments. After including in the calculation social benefits (for example, social security and unemployment insurance), public assistance programs such as the provision of food stamps and the payment of federal taxes, the OPC finds that the median income of the American families increased 55% between 1990 and 2019, a figure much higher than the growth in wages, and incompatible with the idea of ​​stagnation. The improvement was even greater for the bottom 20% of families: income derived from the market grew 51%, and income after including taxes and transfers grew 74%.

And the inequality? Here, to calculate the difference between families with more and less income, the OPC uses a usual statistical indicator that takes into account the distribution of income as a whole (the “Gini coefficient”). Income inequality after including taxes and transfers grew 7% between 1990 and 2019, but all the increase occurred between 1990 and 2007, before the explosion of political and journalistic interest in inequality. Since 2007, inequality has been reduced by 5%.

How do you explain this divergence between the data and what is usually taken for granted? For starters, it’s common for commentators to confuse revenue growth figures in the 1970s and 1980s with the decades that followed. It is true that in that previous period there was a stagnation of income. The annual growth rate of median real household income (after including taxes and transfers) was about three times higher between 1990 and 2019 than between 1979 (the first year for which the OPC has records) and 1990.

The BLS record of wage data starts earlier, showing that consumer prices grew faster than wages between 1973 and 1976 (mostly because of the 1973 oil crisis) and between 1979 and 1981. The Real Wage of the Typical Worker it continued to fall throughout the 1980s. By the end of 1990, it was 9% below the 1973 high.

Second, the surge in concern about inequality during the post-2008 Great Recession and the early years of the subsequent recovery had more to do with stagnant wages and incomes for typical workers and families than the magnitude of the downturn. divergence between families with more and less income. OPC data shows that median real household income, after including taxes and transfers, fell after the financial crisis and did not recover its 2008 level until 2014. Data on wages tell a similar story.

There are many ways to calculate these trends, but the OPC data tells the most accurate story. As the period after the financial crisis shows, it is clear that one cannot speak of continued growth in wages and income. But given the choice between counting it as “growth” or as “stagnation”, the data on wages and income point to the former.

This does not mean that the growth in wages and income has been sufficient, or that the authorities should be satisfied. Congress should make it a high priority to increase labor force participation, better train workers so they can ask for higher wages, and remove barriers to access to opportunities and promotions.

But the fact that wages and incomes have grown over the last few decades should give the authorities the comfort of knowing that they will build on a foundation, not of failure, but of economic success.

The author

He is director of economic policy studies at the American Enterprise Institute.

Copyright: Project Syndicate, 1995 – 2022

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