Incomes in the US
Friday, June 29, 2007 at 09:46AM Are Americans gaining or losing ground financially? It’s pretty clear what’s happening to the wealthy. Just this week, a USA Today headline announced;
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And with $80 billion more money flowing into US hedge funds in just the first quarter of 2007, it seems that the world is still awash with money.
If your intuition is telling you a different story…you’re right. The average American family is not “gaining ground” as far as income is concerned, especially since 1999. In fact, men’s income (inflation adjusted) has remained essentially flat since 1973!
I have studied US incomes for ~10 years. Why the US Government collects all this data is bit of a mystery, but let me tell you, they seem obsessed with analyzing the heck out of the numbers. The US Census Bureau will even give you a CD ROM with >800 tables of income and everything else about our population.
One of the numbers most often published in the media is Median Household Income, so let me dig a little deeper into that as well as US incomes at all levels. Lets’ start by quantifying just how many Households are there in the US?
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As you can see from this chart, the number has almost doubled since 1967, from 61 million to 114 million (as of 2005, 2006 data has not yet been released).
The Median Household Income for 2005 was $46,071. As most of you probably know, the “median” is the middle dividing point, that is, 50% of the households had income higher than this amount, and 50% had lower income. In CA, the median was somewhat higher, @ $51,312. As simple as these numbers seem, leave it to the bureaucrats to make them more complex than need be…the numbers are actually 2-yr. averages (2004-2005), with 2004 inflation adjusted to be in 2005 dollars.
What is reported on a yearly basis (i.e. not averaged) is quintile data…the Gov’t calls it “Income Limits for Each Fifth and Top 5 Percent of Households”. That is, 20%, 40%, 60%, 80%, 95% percentile numbers. This is much more interesting than just the median income. Study for a moment, this chart of US incomes from 1967 to 2005.
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The yellow line, for example, is the 60th percentile income over the years. So 60% of the households have (or had) less income that this, while 40% have income greater than this amount ($57,760 in 2005). Where do you fit?
The chart above shows actual income amounts in those years (called “Then Current Dollars”). The Gov’t also reports the same data, but inflation adjusted. Here is that chart (adjusted to 2005 dollars).
click to enlarge You will note that real (inflation adjusted) income peaked in 1999, and has been edging down in every percentile group. More on that in a moment.
Of particular note is the increasing disparity between the “average” family income and the high-income earners in both dollars and growth rate.
Here is a comparison of percent income gain from 1973 to US income peak in 1999.
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And here is what has happened since 1999.
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If the more realistic pre-Clinton CPI inflation numbers were used (see chart), one would see that actual US incomes have sunk substantially more since 1999 than the chart above indicates.
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Add to this the dramatic loss of the US $ value since 2001 (a 31% drop!). It’s no wonder the real buying power of the average family has been severely eroded.
It may surprise you, as it did me, that increases in (inflation adjusted) income that occurred over the last 30 years (prior to peak in 1999) were primarily from women joining the workforce. Men’s median wages are the same today as in 1973 (within a few hundred dollars), while women’s median income have increased 80% (inflation adjusted). Although women’s wages have gone up, it’s not that they have gone up 80%, but more the fact that more women have entered the workforce, thus moving the median up. Take a look at the following chart to see the effect on Household Income.
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This graph assumes the “median man” marries the “median woman”, and this is their combined income. While this is artificial, it is certainly food for thought, and actually matches the US Median Household income pretty well (an average of <1% error from 1967-2005).
Note that for about 20 years following WWII income really did grow for Households in the US, due to men’s income growth (blue). Since 1973 however, men’s wages have stalled. For women, starting ~1967, their median income began to grow as more women joined the workforce, coinciding with the Women’s Liberation Movement, and have continued to grow as their percentage in the workforce increased further, and as their wages have become more on par with men’s. By 1999, as we saw in the other graphs, Household Incomes peaked, starting a decline that will likely continue for the foreseeable future due to a host of reasons that would require another article.
There is a lot more to say on this subject, but I guess I had better stop. My goal, as stated earlier, was to provide a little more in-depth look into US Household Income, which I have done.
Below are several other charts that might be interest that were not used in the article.
Reader Comments (6)
Wow, this was really good! The devil is always in the details.
So Household Income rose in the last few decades only because women joined the labor force. Their impact was rising until 1999, and there is no encore. Will we put our kids to work next?
One thing that surprised me is that adjusted for inflation, the rich are not getting richer. Everyone's wages are stagnant.
Although the US dollar has lost 30% of its value against the euro, how does that affect my purchasing power if I don't buy anything from Europe? Oil is priced in dollars, and Chinese goods are priced in dollars effectively because they peg their currency to ours.
But I have noticed that Made in China is getting more a symbol of cheap cheap crap, like those tennis balls I got (10-pack) that won't bounce from than 6" off the ground or the coffee mug that started rusting after 2 weeks. Perhaps their import costs are rising, since they buy tools and other input from Europe, so they must produce with less quality to make up for the falling dollar?
Glad you liked it Schahrzad!
I thought the same thing...are we going to put our kids to work next?
The super-rich, top 1% are gaining ground, everyone else is treading water at best, and as you know, many are drowning due to the enormous debt load they have mistakenly taken on.
There are industries that are doing well however...if one works in the high-end Financial Sector things are sweet. My nephew works for GS, and his 2006 bouns was 2X his 6 figure salary.
The Dollar Index (which has dropped 31% since 2001) is not against the Euro per se, but of a "basket" of currencies. Thus, if we buy anything or go anywhere in the world, we're in big trouble. I travel a lot (outside the US), and it's not pretty. The last 3 places I went, the hotel rooms were $400/night for a typical room. Low end (2 star) were $150.
Even though cheap products from China are heping to mask the demise of the dollar, most items in the US are globally tied together...the price of steel and aluminum for cars are a prime example. Their costs are way up due to the dollar collapse. And you mentioned oil. Energy costs are set globally, the drop in the US dollar is one of the major reasons that oil prices (and thus gasoline) are up in the US. Prices are not up nearly as much in places even as close as Canada due to the stregth of their dollar compared to ours. And make no mistake about it, 100% of the things we buy require energy to produce or grow, to transport, and to sell. Thus the 31% drop has a non-intuitive ripple effect through our economy...there is no free lunch.
And you know that one of the main reasons Florida RE had a super spike was due to foreign "investors" who, because of the dollar collapse, came in and swooped up properties at big discounts. If the US$ were strong, that would not have happened.
Where do we get information on foreign investors?
Why don't we see higher inflation as a result of the dollar losing 30% in the last 5 years? Shouldn't we see at least 1/3 of that inflation passed on in our imports?
At one time, money flowed from wages to consumption, saving, and investment. Now we are flowing in the opposite direction: tapping our investments for consumption. This is a short-lived game. Within a few years at the most, we should be in a deep Depression in this country. I really don't see how it can be avoided. We need to get to a point where our productivity matches our consumption. Balance, natural law, the basics.
Even a week before the Depression hit, everything was rosy. High stock market and productivity and wages. Then it all crashed at once. The signs were there, but the internet wasn't around for people to discuss it, like we can now.
I wonder if we will have a huge financial collapse in the next week, or even sometime this year, as the derivatives leverage collapses under the sheer weight of high risk investments-gone-bad in the financial sector. Morgan Stanley alone has $65 trillion of derivatives on its books.
Do you remember why we say, "not worth a Continental?" Because we in the US totally destroyed our currency once before, and we had hyperinflation. As a result, the founding fathers said only silver and gold could be real money. No more paper money. Then Congress established the Federal Reserve, which gradually destroyed the real money and replaced it with paper money by 1971. About 40 years of that is all the system can handle, and soon we'll say, "Not worth a dollar". Although my gold has gone down in value, I know it's the only real money I own, and I take great comfort in owning gold. The rest is going to be worthless soon.
I'm not sure I agree with the idea that the "Top 1% is gaining ground" while everyone else is treading water. I am currently in the top 1%, according to these charts. I'm a lawyer with a great position. Yet 3 years ago I was in the 80th percentile; 5 years ago I was about the 60th.
There is no static "1%." People fall and rise in and out of these percentiles over time. Next year I may ver likely be in the 95th rather than then 99th due to anticipated reductions in my business.
So the people in that top 1% are fluid, I see.
Business owners in the top 1% can rise in and out of that range, that makes sense.
But wouldn't jobs at investment banks, or professions like surgeon or attorney or certain engineers, keep you in the top 1%?
I put one more picture at the bottom of the text. I think if you read that little clip it should shed some light on how well the top 1% are doing. The top 1% took home the largest percentage of the US Income (28.1%) since 1928!
In addition to that, let me share this little tidbit...between 1976 and 1998, the share of wealth in the US held by the top 1% went from 19.9% to 38.1%, and it's only gotten worse since then (from Jerome Levy Economics Institute report).
I think any doubt that "the top 1% are gaining ground" should be gone now. Few things in life are so clear.