Summary: definitions matter much more than I expected.
There have been lots of public opinions about the change in median income in the US, and what it means for policies. It turns out that the definition of median income matters much more than I expected.
This table shows the increase in percentage from 1979 to 2007, for those who want the answer up front:
| Income Included | Tax Unit | Household | Size Adjusted Tax Unit | Adjusted Household |
|---|---|---|---|---|
| pre tax, pre-transfer | 3.2 | 12.5 | 14.5 | 20.6 |
| pre tax, post-transfer | 6.0 | 15.2 | 17.0 | 23.6 |
| post tax, post-transfer | 9.5 | 20.2 | 25.0 | 29.3 |
| post both, plus health insurance | 18.2 | 27.3 | 22.0 | 36.7 |
The widely reported figure is the 3.2. This is used to argue that there has been no improvement. All the gains have gone to the top 1%. The middle class is being hollowed out.
The different definitions make for a more nuanced answer, and reflect difficulties in getting data.
The different terms are:
- Tax Unit is the tax filing unit. This is what the IRS tax statistics report.
- Household is what you would expect. It's all the people in the house. So everyone in the household is combined. This captures the effects of grandparents, parents, and children all being potential earners and sharing income and expenses. It also captures unmarried couples, shared custody, etc. The IRS statistics don't capture this, but the monthly Census survey does.
- Size adjustment modifies the income using the same adjustment as is used for cost of living. A family of four needs more income than a single person, but not four times more.
- The kinds of income reflect regular wages/dividends, transfer payments like social security or food stamps, and finally health insurance benefits. These variations also reflect data gathering. The IRS can measure some transfer income, like the EITC, but not other transfer income, like food stamps. EITC and food stamps are two very large social welfare programs in the US.
A recent paper is interesting in that it works from the census bureau data rather than the tax data. This lets it measure households, transfer payments, and health insurance. The tax information can only measure tax units. They compared their results with the tax data and confirmed that they matched when measuring the categories that the IRS can measure.
My Conclusions:
- There is no "right" number. The proper issue is what is the question that you are trying to answer. The shifts in households, with grandparents and adult children moving back together with parents may be a compensation for economic hard times. These numbers show that it works and has more than compensated for income loss. Health insurance costs have gone up dramatically, as these numbers show. Transfer payments and a progressive tax rate do appear to have a significant effect.
- The "middle class is vanishing" is at best misleading.
Paper is at http://www.nber.org/papers/w17164
There is some more data on trends in household sizes, etc. There is also a breakdown of quintiles. For the all included houehold category, the bottom quintile saw 26.4% growth and the top quintile saw 52.6% growth. The top 5% saw 63% growth. There is no data for the top 1% because privacy related data blinding was applied by the census bureau, and only larger aggregates are reported.
So you can argue that all parts of the population saw significant improvement, or that the rich saw a larger improvement, or that the middle class is suffering. The data shows that the progressive tax rate (EITC included) does have an effect, transfer payments and the social programs do make a difference, and that healthcare benefits do make a difference.
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