GDP per Capita versus Median Family Income

Here's a nice way to picture the growth in inequality in recent decades from Lane Kenworthy:

Slow Income Growth for Middle America, by Lane Kenworthy: The economic challenges and strains facing middle-class Americans are likely to get a good bit of attention between now and election day, at least from the Obama campaign. They include sluggish income growth, heightened financial insecurity, rising health care and college costs, and falling home values. Each of these is important, but the most critical in my view is slow growth of incomes.

The following chart tells the story.

It shows inflation-adjusted GDP per capita and median family income from 1947 (the earliest year for which the income data are available) to 2007. To facilitate comparison of the over-time trends, each is indexed to its 1973 level. Since the mid-to-late 1970s, growth of income at the median has been slow — very slow — relative to growth of the economy. The current decade, with no improvement at all in median income, is especially striking.

The dashed line in the next chart shows what median income would have looked like had it risen in sync with per capita GDP. The difference is huge: in 2007, the median family’s income would have been $91,000 instead of $61,000.

Various excuses and rationalizations have been offered: It’s okay because Americans now get more in employer benefits instead of in their paycheck. Family size has shrunk, so slow income growth isn’t a big deal. A lot of those in the bottom half are immigrants, and even with slow income growth they’re better off than they would have been in their native country. None of these is compelling (see here or here).

The disconnect between economic growth and middle-class income growth is due largely to rising inequality. In the past several decades much of the economy’s growth has gone to those at the top of the income distribution.

Faster income growth wouldn’t render other middle-class strains irrelevant. But it would help.

Comments

[elvis]

How do other countries fare?

[Anarcho]

Notice the break happened around the late 1970s and early 1980s, just when Milton Friedman's ideas were being implemented...

Apparently the onslaught against the New Deal and unions produced more inequality, so suggesting that free(r) market capitalism does not result in lower inequality and more return to labour as Friedman asserted. Shame that Friedman never bothered to comment on that in his introduction to the 2002 edition of "Capitalism and Freedom"...

Oh, hum. I guess being utterly wrong does not really matter when you make the rich richer and help secure the social hierarchy by breaking rebel workers....

[Inflation is the Enemy]

The break happened when inflation kicked into high gear. If new money is created, and given to just a few people to spend, those few people live high. The rest of the population loses ground because they cannot consume the same items that the lucky few new money recipients have already consumed.

Creating new money, giving it to a few, and hoping that the benefits will somehow trickle down to the rest of the population just doesn't work. Experience shows that the few lucky recipients get all of the benefits, and everyone else loses ground. GDP is only so large over the long run, and diverting a portion of GDP to new money recipients leaves a smaller share of the pie for everyone else.

Inflation is the enemy. Get rid of inflation, and let all consumers benefit equally from a larger GDP. Alternatively, send every citizen an equal share of newly created money (rebate check), instead of giving it to just a lucky few.

[One Salient Oversight]

I like you Inflation is the enemy, you sing my song.

However I would also point out that even when inflation lowered after the economy got Volckerized in the early 80s, the disparity remained. I think that this was due to Reagan's tax cuts for the rich. In fact you could probably argue from this graph that America's growing income disparity has its basis in Conservative economic dogma like supply side economics, large fiscal deficits and the aforementioned tax cuts.

[Inflation is the Enemy]

Good point about the lowered tax rates on the rich One Salient Oversight. Progressively taxing the rich to fund necessary public services increases equality. Using inflation as a means to raise resources is regressive (eroding grandma's non indexed pension/meager savings is not the way to go). Inflation also has many harmful effects on the economy, as you point out in your article.

[bakho]

This is median FAMILY income at a time when large numbers of women entered the workforce which is even worse than it looks.

It increases during expansions and decreases during recessions since 1980.

Just curious, how does divorce affect median family income? I would think it might make it go down depending on definitions and calculations.

[bakho]

How much does trade deficit affect median family income? That is money from GDP that is spent abroad, not going to additional family income.

It looks like the gap is more stable when the trade deficit is stable but expands when the trade deficit expands.

Is decline in workforce participation responsible for the decline in family income? A lot of second incomes drop out during recessions and that causes the median FAMILY income to drop.

My bad in the above post about divorce. Divorce negatively affects the household income, but not family income.

[ken melvin]

Ah oui, it happened when ... What's a matter? Doesn't anyone believe in markets anymore? Looks to me like it happened when automation struck, then America, w/ ronnie in the bow of the canoe, rowed downstream like hell while yelling, 'whee look at us go.' Once there was a surplus of workers, engineers, etc., ... the race to the bottom had begun in earnest.

[Ninja Zombie]

I wonder how much of this is due to better returns to (and measurements of) worker productivity.

In old style manufacturing jobs (much of the growth from 1945-1970, I believe), most workers were interchangeable. They got paid the same, except for seniority rules. In the present economy, some workers are vastly more productive than others, and this productivity gain can be measured. If compensation follows productivity, we would expect HUGE increases in inequality.

Another thing I'd like to know is what happens if we look at compensation averaged over time for each worker. I've read that income volatility is much higher now than in the past, and this can skew the numbers. A friend of mine is a stagehand, who has an median income (over, e.g., 5 years) of $20k but a mean income of $40-50k. Anecdotally, I'd suggest variation like this is not uncommon for small business owners, consultants, people with performance bonuses, etc.

[paine]

"in 2007, the median family’s income
would have been $91,000 instead of $61,000"

nice numbers

"If compensation follows productivity,
we would expect HUGE increases in inequality"

this doesn't follow relative price adjustments matter here too
its safer to look at the relative private cost of "producing" the different skills
and figuring the rest of the comp
follows from various "rent sumps"
lurking here and there and every where
in the " price system"
some rent sumps ...big ones too ...
live long prosperous lives
right there
in the middle of
our job market's "price system" itself

[paine]

"Looks to me like it happened when automation struck"

putting aside the restructuring
of corporate job force demand over time
between different shares of skill vs unskill
i agree automation strikes deep
into our wages it creeps
but tech change
(even plus encroachiing importation comp )
only accounts for sector job force shrink
not for economy wide
median jobholder income drops

something else has to happen
ie
the job market has to under perform

we need to move back toward
the arsenal of democracy system
of the early 40's
where too many jobs start chasing
too few people

[paine]

"How much does trade deficit affect median family income? That is money from GDP that is spent abroad, not going to additional family income"
not at all ...in the short run
that is
if
the gub runs a big enough deficit

simple simon formula

m-x = g-t

[paine]

bakho
don't conflate cycle behaviour
with secular trends
the median has a long run slide
vis a vis
gdp/pop
even if this drop comes during down turns

its the fact the diff increase do to he drop
isn't closed by accelerating income
on the up turns
accounts for the secular decline

the data may always show
a slow down
and a speed up
over the cycle
for both gdp and income

like two speeding cars taking a curve and then entering a straight away

but one car here after a period of staying even
over all is starting to leave the other behind

maybe gdp always beats med-income
on the curves
but med-income no longer closes
the gap on the straight away

[markg]

The graphs only show disconnect during the Carter, Bush1, and Bush2 years. During the Reagan and Clinton years the increase in both were almost parallel. This makes it hard to blame the problem on supply/demand side policies or DEM/REP policies.
I will offer one possible explanation. Financial wealth (not real wealth) can only be obtained in our credit economy if someone else goes in debt. During the years of rising median incomes (pre 1968, 1982-1990, and 1992-1999) the public debt (govt owed to the public) was >40% of gdp. This satisfied the financial wealth needs of the wealthy so they more likely to share productivity gains with working class America. Periods of stagnant median incomes coincided with lower or falling govt debt ratios. When govt debt owed to the public is too small to meet the financial wealth needs of the rich, they turned to obtaining it (financial wealth) from middle class America with stagnant wages and rising individual debt burdens.

[Richard A.]

The size of the family has been decreasing while per capita is and always will be one. This graph compares apples with oranges.

See --
http://mjperry.blogspot.com/2008/09/five-problems-with-census-poverty.html
Remember to triple click.

[ken melvin]

The world will never again see too many jobs chasing too few workers. That model, as many another, is broken.

[paine]

lm

"The world will never again see too many jobs chasing too few workers. That model, as many another, is broken."

i conjecture
"that model " has 9 lives

and will return.....suddenly and unbound
maybe before we u and i
depart
this earthly caravan
for heaven hell
or
just a dirt mound

[Richard A.]

There are better ways to show increasing inequality. First, look at wages not family income. Then compare mean wages to median wages. Another approach is the gini index.
http://en.wikipedia.org/wiki/Gini_coefficient

[sw]

The two lines break from one another at the beginning of the biggest debt binge in the history of mankind -- imagine that.

[Facts are stubborn things]

This is not a particularly good post.

Comparing per-capita GDP and median incomes mixes apples and oranges. There are many points here.

1. GDP is calculated using the GDP deflator. Median incomes are adjusted using the CPI. After WWII, the GDP deflator and the CPI tracked. However, starting in the 1970s they diverged and have continued to move separately. A quote from Dean Baker should help

"The consumption deflator used to measure real wages has shown a much higher rate of inflation than the output deflator used to measure productivity growth. This is due to the fact that the price of many consumer goods and services, like health care and education, have risen considerably more rapidly than the price of investment goods like computers. If a consumption deflator is used to measure output, then the rate of annual productivity growth is reduced by 0.2 percentage points in the period from 1973 to 2006. In the period from 1947 to 1973 the consumption deflator actually increased less rapidly than the output deflator."

2. No one can consume GDP. NDP (GDP minus depreciation) is the potential basis for consumer outlays, investment, etc. For various reasons, NDP is a declining fraction of GDP.

As mentioned above, Dean Baker has written on this subject. See "Falling Wage Shares" (http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=08&year=2006&base_name=falling_wage_shares) and "The Productivity to Paycheck Gap: What the Data Show" (http://www.cepr.net/documents/publications/growth_failure_2007_04.pdf).

Adjusting for these factor markedly reduces the gap between per-capita GDP growth and median incomes. It does not eliminate it however.

2. No one can consume GDP. NDP (GDP minus depreciation) is the potential basis for consumer outlays, investment, etc. For various reasons, NNP is a declining fraction of GDP.

Dean Baker has written on this subject. See "Falling Wage Shares" (http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=08&year=2006&base_name=falling_wage_shares) and "The Productivity to Paycheck Gap: What the Data Show" (http://www.cepr.net/documents/publications/growth_failure_2007_04.pdf).

Adjusting for these factor markedly reduces the gap between per-capita GDP growth and median incomes. It does not eliminate it however.

[Noni Mausa]

This concurrent post over at Angry Bear might interest you. I must say, the comments are much richer and more interesting than the main post.

http://angrybear.blogspot.com/2008/09/minimum-wage-and-regular-citizen-can.html

Noni

[George]

Facts are stubborn things says:

"GDP is calculated using the GDP deflator. Median incomes are adjusted using the CPI."

The Real GDP is calculated using the GDP deflater. Real Median incomes are adjusted using the CPI. Kenworthy is using the growth rate nominal dollar value of per capita GDP, and the same for median income. Since the GDP = GDI (Gross Domestic Income) per capita GDP is a good back of the envelope number for average income, and while not perfect certainly good enough for a Blog.

George

[Roger Chittum]

The comment by Facts are stubborn things addresses issues that seem key.

The method of calculating CPI has undergone several changes since the 1970s and all changes had the effect of showing lower inflation than the earlier methods. http://www.realitybase.org/journal/2008/5/22/my-portrayals-of-middle-class-decline-have-been-too-optimist.html If the pre-1973 CPI methodology were used to adjust the post-1973 incomes, the adjusted incomes in the later years would be smaller than shown here. So unless the GDP deflator was similarly changed, the divergence between per-capita GDP and median family incomes after 1973 would be even greater than portrayed in Mark’s graph. Right? In any event, the two statistics tracked each other very closely for 26 years before they diverged, and changes in statistical methods don’t seem like the most probable explanation for the sudden and persistent divergence after 1973.

Pages 59 and 60 of this slideshow link provided by Mark above http://www.u.arizona.edu/~lkenwor/indv102slowincomegrowth.pdf show that median household incomes in the UK and Sweden continued to track per-capita GDP, while the Great Divergence was occurring in America. And the other Lane Kenworthy post linked by Mark http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/ shows that after-tax incomes of the top 1% continued to rise rapidly after income growth for the bottom 80% stagnated. A graph of pre-tax family incomes for each quintile is here. http://www.realitybase.org/journal/2008/7/10/the-recession-is-coming-the-recession-is-coming-republished.html It shows that the Great Divergence is a pre-tax problem, not just a function of lower top marginal tax rates.

Mark posted a couple of days ago about the inconsistent effects of current account deficits on the GDP deflator and the CPI. We’ve been in a deficit most of the time since 1973. How much of the Great Divergence can that explain?

[paine]

guys keep your shirts on

dean only suggests a correction
not a reversal
the trend is indeed still in the data
its exact numbers hardly change
the existence of a cataractic mod of the twostats
trend relationship
we know the cataract occured somewhere
between johnson and bush I
and we know it's solid exisence
counters
a lot of magical republican thinking

[Kaleberg]

Wow, I actually did a very similar analysis a few months ago, except I used the Census Bureau’s (actually Lebergott’s) median value of a full time job. Of course, not everyone can get a full time job, but I figured I could get a sense of how our society values work. I came up with very similar results. My divergence began in the 1960s, but the ratio of a full time salary to per capita GDP has been moving downhill since. You can see my numbers at:

http://www.kaleberg.com/househours/gdpshare.html

I also did a related analysis on the cost of a home in hours per year. Basically I used the median wage, the median home price and the median mortgage rate. Here, the big drop was in the late 70s and early 80s when a house went from 600 to 800 hours, with some scary highs of over a 1000 hours in the golden Reagan years. A typical work year is less than 2000 hours. You can check my work at:

http://www.kaleberg.com/househours/index.html

I avoided the inflation adjustment issue by using nominal GDP, wages prices and so on, rather than turning everything into current dollars.

[X Man]

I agree that it's all about wages. Wage growth has been miserable for pretty much everyone but the professional class.

[ekkehart]

Here is my theory about the reasons for increased inequality:
http://www.economics-ejournal.org/economics/journalarticles/2007-13

[Not George]

George,

I am not sure what you are arguing. However, how can it be reasonable to compare incomes deflated using different price indexes?

I downloaded the data from the BLS, Census, EROP, and BEA and reproduced the chart above. Just as I stated earlier, GDP was deflated using the GDP deflator and median family incomes were deflated using the CPI-U. I can send you a spreadsheet with all (lots and lots) of the data.

However, there are (at least) two more errors worth noting.

1. Per-Capita GDP is a poor measure of economic performance because it fails to take into account the worker / population ration. This ratio has risen dramatically since WWII. Stated differently, per-worker GDP has risen much less than people think (since 1973), but this has been masked by a strongly rising worker / population ratio.

2. The number of workers per-family has risen strongly since WWII (female labor force entry). This should have caused a stronger rise in per-family incomes. In other words, the actual data understate how badly the median family is doing by not taking into account the rising number of workers per-family.

As you can see comparing per-capita GDP to median family incomes is a muddled mess.

[Walt French]

How can we have a productive discussion about income distribution without discussing the dramatic shift in the nature of households over the past 50 years?

Hasn't the number of young adults living independently of their parents gone up dramatically? Doesn't this cut the per-household income but not the effective income per demographic age cohort, etc?

Yes, we're maybe now seeing a rebound with more young adults living with their parents, which, if per-household income is stagnant, is a double-whammy in indicating tough income stats. But most of the period, gy my casual recollection, has been marked by young adults (gleefully, in my case) jumping out of the nest and going their own way. That marked a big improvement in well-being from my perspective, but it plays havoc with per-household statistics.