What's Happening To Americans' Income?

Policy Backgrounders | Economy

No. 138
Monday, January 29, 1996
by W. Michael Cox & Beverly J. Fox


Notes

  1. The views in this paper are not necessarily those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
  2. For a discussion of these aspects, see W. Michael Cox and Richard Alm, "These Are the Good Old Days: A Report on U.S. Living Standards," Annual Report, Federal Reserve Bank of Dallas, 1994, pp. 2-15.
  3. In 1991, the Department of Commerce switched from gross national product (GNP) to GDP as its generally preferred measure of aggregate economic activity. Figure I uses GNP data since GDP data are not available before 1947. Because the difference between the GNP and GDP series is negligible (less than one-tenth of 1 percent on average), the distinction is unimportant here and the term GDP will be used henceforth.
  4. The average growth rates of per capita real GDP during the periods 1869-1953, 1954-73 and 1974-89 were estimated by regressing the log of per capita real GDP on a constant and time for each of the three separate periods. The same is true for consumption, beginning in 1889. Available GDP data begin in 1869, and consumption and government purchases data begin in 1889. The years 1953, 1973 and 1989 were chosen because they represent business-cycle peaks.
  5. More precisely, per capita real GDP growth averaged 1.61 percent, 2.08 percent and 1.64 percent, respectively, over the three successive periods. Thus growth during the 1974-89 period was actually slightly higher than that during 1869-1953.
  6. Per capita real GDP hit a trough later than the official GDP trough, as the recovery's initial GDP gains fell short of simple population growth.
  7. Mark A. Wynne, "The Comparative Growth Performance of the U.S. Economy in the Postwar Period," Economic Review, First Quarter 1992, Federal Reserve Bank of Dallas, pp. 1-16; and "How Serious Is the Productivity Problem in the U.S.?" Southwest Economy, May/June 1992, Federal Reserve Bank of Dallas, pp. 1-3.
  8. Roger C. Kormendi, "Government Debt, Government Spending and Private Behavior," American Economic Review, Vol. 73, December 1983, pp. 994-1010; and David Alan Aschauer, "Fiscal Policy and Aggregate Demand," American Economic Review, Vol. 75, March 1985, pp. 117-27. The government purchases many types of items, from tanks to school lunches. Clearly, some goods provided publicly -- food stamps, rent subsidies, school lunches, Medicare and so on -- are of a consumer nature and may be valued by households as equivalent to those they could buy privately. Following the research of Kormendi and Aschauer, we assume that approximately 23 percent of government nondefense purchases are viewed by households as equivalent to their own private consumption.
  9. Growth in total real consumption averaged 1.6 percent annually during the 1889-1953 period and 1.9 percent during the 1974-89 period, then jumped to more than 2.4 percent during 1954-73.
  10. Each of the series cited henceforth -- per capita personal income, median household income, median family income, average hourly wages and total compensation -- are deflated using the CPI-UX1 consumer price index.
  11. More specifically, the data show that in 1973 the average household had 1.34 adults (members age 18 or older) in the labor force, 0.67 adults not participating in the labor force and one child. For 1993, these numbers are 1.34, 0.60 and 0.69, respectively.
  12. Another problem with the wage data is that they do not measure take-home pay, as affected by tax rates and transfer payments. Adjustment for these factors is beyond the scope of this study.
  13. As the age of the workforce declines, so do the level of experience, income and wages, yet the aggregate measures conceal this change. We make no attempt to adjust for the age factor here.
  14. More precisely, per capita real GDP growth averaged 1.61 percent, 2.08 percent and 1.64 percent, respectively, over the three successive periods. Thus growth during the 1974-89 period was actually slightly higher than during 1869-1953.
  15. W. Michael Cox and Richard Alm, "These Are the Good Old Days: A Report on U.S. Living Standards," pp. 2-15.
  16. See Cox and Alm, "The Service Sector: Give It Some Respect," pp. 3-22, for a broad examination of the growth of the service sector and what it portends.
  17. Two other major income data adjustments needed are for taxes (and transfers) and improvements in product quality. The Department of Labor recently began an extensive study to determine the extent (if any) to which price indexes are overstated due to an under-recognition of the gains in product quality. Overstatement of inflation would be tantamount to understatement of the gains in virtually every series on Americans' monetary well-being, including real GDP, consumption, wages, compensation and income.

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