Poor and Middle Class Incomes Have Increased Significantly

November 26, 2013

Public discussion of the economy is wondering why it is that since the 1970s poor and middle class households have seen practically no improvement in living standards, says Scott Winship, the Walter B. Wriston Fellow at the Manhattan Institute.

A widely-cited Economic Policy Institute study, for instance, says median household income was just 5 percent higher in 2012 than in 1979 and that the poverty rate rose from 11.7 percent to 15.0 percent.

But these worrying conclusions flow from problematic analyses.

  • Contrary to conventional wisdom, poor and middle class households are at least 30 percent richer today than their counterparts from 35 years ago.
  • Most analysts of income trends simply accept that the official Census Bureau figures are the best available.

But those figures have three important shortcomings.

  • First, they rely on an inferior way of accounting for changes in the cost of living. The best set of inflation estimates developed by the Bureau of Labor Statistics (BLS) only goes back to 1999, so it cannot be used to consider long-term income trends. However, a similar set of estimates from the Bureau of Economic Analysis is available back to the 1920s and indicates the same change in the cost of living after 1999 as the BLS series. Using this more sophisticated cost-of-living adjustment, which is preferred by the Congressional Budget Office and Federal Reserve Board, the increase in median household income was not 5 percent but 16 percent from 1979 to 2012.
  • Second, the official Census Bureau figures indicate that the household at the 20th percentile of income -- poorer than 80 percent of households and richer than only 20 percent of them -- was no better off in 2012 than in 1979. Switching to the better cost-of-living adjustment, however, shows a 10 percent improvement -- and a 19 percent improvement comparing the 1979 peak to the 2007 peak.
  • Finally, the Census Bureau figures do not account for the fact that households have become smaller over time.

Source: Scott Winship, "Poor and Middle Class Incomes Have Increased Significantly," Economic Policies for the 21st Century, November 13, 2013.

 

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