Wednesday, September 13, 2017

First of Two Pieces on Income

The Census Bureau reports this week that real median household income hit a record high.

There’s been quite a bit in the news over the last decade or so about stagnating incomes. This is the piece of evidence that is primarily used to justify that position. In this case, real median income for households just passed the previous peak from 1999. The implication is that incomes fell and recovered in that intervening period:

The discontinuity towards the right notes a change in how the data was measured.

Data like this is used to justify the position that the economy is weak.

That may be, but it’s also important to consider what the data is missing. In this case, it’s the definition of a household. We’re in the midst of a multi-decade phase of people living in smaller households: parents have fewer kids, couples get divorced more, and it’s quite a bit less likely for working adults who are not related (as in TV shows like Two Broke Girls) to live together than it used to be.

If households are getting smaller with the passage of time, this means that the data in the graph above is understating growth in the data, and that understatement gets more severe as you go to the right.

Officially, the Census Bureau does not make that adjustment. But it’s fairly easy to find on the internet (here’s an article from Forbes from a few years back). It combines it with a second adjustment for the price index used to deflate nominal incomes (they advocate using the PCE).

While the Census Bureau estimates suggest that median household income rose by just 10 percent from 1969 to 2013, when the PCE is used for inflation adjustment and incomes are adjusted for the number of adults in a household, the increase was 30 percent. The 10 percent rise the Census Bureau estimates translates into a $4,800 increase. A 30 percent rise in unadjusted terms would amount to $14,400—quite a difference.

These issues are not hidden. But they are on the difficult side.

An appropriate interpretation is that the Census Bureau is providing a first pass estimate that indicates there may be a problem. Dig a little deeper, and the second pass says we should worry less. That part doesn’t get covered in the legacy media enough.

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