Saturday, May 16, 2015

Economists on US Median Income

Here are economist’s perspective on the 35 year slowdown in median wage growth. The political like to use the slowdown to “prove” that whatever they don’t like is causing economic harm. Experts don’t even agree on the premise that the US Median income is a good measure of change in economic standard of living.

A picture

Why isn’t US Median Income capturing the Median American Household’s economic progress? Some reasons:

“Over the 1980-2014 period CPI probably does not fully account for quality improvements or for the value of new goods”

“The rise in life expectancy alone is worth on the order of 1% per year.”

“Difficult question, but life expectancy is up from 74 to 79 years - seems like a substantial gain not reflected in real median income.”

“Due to measurement issues e.g. prices, family composition, measures of income, prob understates by >1% py. Add to that price quality bias.”

“Burkhauser et al. (2011) show faster growth in median post-tax, post-transfer size-adjusted household income including health ins. benefits.”

“CPI has improved but is imperfect. Capital income matters, especially for retirees. Mean household size has shrunk from around 3.3 to 2.6.”

“Define substantial. Agree that CPI overstates inflation.”

Common reasons: Changes in family composition – smaller household size, makes median household income smaller than per person measurement. CPI is an imperfect measure, particularly because it poorly accounts for fundamentally new goods and quality improvements. The rise in life expectancy is a phenomenal improvement. Employers are spending more on healthcare for their workers in lieu of higher wages.

Dissenters often invoked the truth that more people (especially women) are working more hours.

At the end of the day,

“No one I know would rather face the 1980 bundle of goods (at 1980 prices) than current bundle, at anywhere near the same incomes.”

From the comparisons I’ve seen, it is hard to disagree with that.