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This image shows US real median household income.

US Real Media Household Income

It seems remarkable for its lack of growth over the last 20 years. This has been the subject of much political debate (around the "1%" and "occupy Wall Street" movements, etc.) but I am interested in more objective economic analysis of this phenomenon.

Given that people are better educated and are working with better technology (which should make them more productive), and that the real economy has grown more generally, what economic theories can explain the lack of growth in real median household income?

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One thing to consider - government expenditures are usually calculated as a plus to GDP. This basically means that they are counted twice, so a growing government will increase the GDP metrics, but not the actual incomes people have. I haven't compared the GDP growth in the US with the growth of government expenditures, but it might be an interesting research avenue. If a private company was doing something like this, the IRS would be very interested, I recon... :D – Luaan Feb 4 at 17:15
up vote 18 down vote accepted

I find your question very interesting. The metric of median household income is also used by others to argue the presence of income inequality: https://en.wikipedia.org/wiki/Income_inequality_in_the_United_States#Causes

However, it seems that it is not only the median but also the mean that stagnates:

Mean vs. median

(I used family instead of household income because I could not find a time series for mean household income.)

If the problem was only one of inequality then the mean income should still increase.

I think there are several reasons why median household income seems to stagnate.

First of all I think there is a visible upward trend that is only somewhat masked by the 2008 financial crisis. Granted this trend is still smaller than the increase of productivity. Why median household income grows at a slower pace than before is still a question.

I think the problem arises because neither the number of households nor their distribution is constant.

Changing size of households

One thing that I believe has an effect is that average household size has decreased over the period you are looking at.

enter image description here

(I had some trouble opening the Census Bureau's xls files.)

So while total household income has in fact increased it is now divided between more numerous, smaller households making both the mean and the median smaller.

Changing composition of the US labor force

Another reason might be immigration. According to this site (I don't know if the statistics are reliable, there are a lot of links on the site I consider to be politically biased) the mean immigrant income is lower than the mean 'native' income. This is not surprising, immigrants need time to adjust and build the social networks necessary to get good jobs. Depending on the measure of productivity you use this can mean that while productivity in any given industry increases the weight of low-productivity industries increases as well. Thereby immigration may decrease mean and median income. Note that this does not imply anything about the effect of immigration on the welfare of 'natives'. I am not claiming that the median household income of 'natives' is increased or decreased, I am pointing out that the weights used in the calculation are shifting.

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Great answer densp. The point about shrinking household size, in particular, is something I completely overlooked and a great example of how statistics can be misleading if you don't spend the time to think about what they are actually telling you. – Ubiquitous Feb 4 at 16:28
    
indeed great answer. housing sqft is one of the great examples of how a "market basket of goods" is getting better every year. – james turner Feb 4 at 17:50
    
@jamesturner I am afraid I don't know what you mean. – denesp Feb 4 at 18:12
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@denesp when someone talks about "real" income/prices/etc. they mean nominal (normal) prices, that have been adjusted for inflation (so older dollars are worth more than newer dollars). that adjustment calculation is done by comparing the nominal price of a "market basket of goods" from one year to the next and assuming both baskets have the same value. however, when we moved from cassette tapes to cds, the market basket got better. similarly, as people buy larger houses, the median house price goes up, due not to inflation, but it will be measured as inflation. – james turner Feb 4 at 18:20
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It makes sense during the recession people would delay moving out and forming new households see the dip in 2008 then they pick up latter spreading the income over more households – sdrawkcabdear Feb 4 at 21:54

Three points - one which has already been raised much better by denesp:

  1. Are household sizes the same (we see the answer as no)? How about amount of earners per household?

  2. What about the amount of goods and services that these household incomes can buy? Should wages be increasing if a dollar can get more goods and services, thanks to technology? Many people like to discuss the rising costs of goods and services, but if you compare a house from 1960 to today (for an example), the amount of amenities a house has today is insane compared to 1960 and we'd expect the cost to rise. It's important to highlight that we're not comparing apples to apples from the past to today thanks to technology.

  3. If you look further at statistics you'll see the people move in an out of income categories, so maybe the median has remained the same, but the other levels are increasing (FT had a graph showing other income brackets below and above median are rising). Given that any particular person will be in the top 30% of incomes at some point in his/her life (usually in the late 40s to early 60s at career peak), we should be looking if the income stagnation has occurred at these levels as well - that would be a possible cause for concern. Median household income being about the same might be a normal statistical event (though the household size decreasing indicates that these incomes are not stagnant and thus it's a little abnormal).

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It's good that you included "labor-economics" and "wages" in your tags.

The basic answer to your question is that activities like "having a job" - which is how most households earn most of their income - are simply less and less effective a means of "acquiring wealth".

Piketty explains it brilliantly in his book "Capital In the 21st Century".

Here is a very good summary by Robert Solow, in the New Republic:

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because official government published inflation statistics are just as artificial as the fiat currency value they intend to measure. according to those statistics, "a loaf of bread" has gone up in price dramatically in the last 100 years. but realistically, i think it would have cost hundreds of dollars to get a loaf of bread of the same quality and consistency as cobblestone bakery's "million dollar white bread" way back in 1916. that simple everyday example doesn't even begin to account account for the price of important stuff like pharmaceutical grade penicillin.

it is a shame that people use the word "real" to refer to inflation-adjusted numbers, as if they are somehow more realistic. life is getting better due solely to technological advancement. that advancement makes everyone richer. arguably, it has been more useful to centralized systems (e.g. governments and large corporations) in the past few thousand years. however, i for one am hopeful that the next few hundred years will be characterized by more decentralizing technology (e.g. the internet, bitcoin, etc.) that will be more beneficial to the "common man".

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Interesting perspective. I never thought about how much it would cost to make a loaf of bread the same way they did back then. I mean, technology has made wheat easier to grow and harvest, the baking process - all of it is on an industrial scale now. To make it like they did 'back in the day' would indeed cost a LOT of money today. – CramerTV Feb 5 at 0:49

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