Friday, September 15, 2017

2.5 cheers for 2016's new high in real median household income!

 - by New Deal democrat

Given that I consider jobs and wages for average Americans my #1 focus, it's only fair that I write about this week's release of the real median household income for 2016, don't you think? 

A few years ago I wrote that real median household income was the most misused statistic in the entire econoblogosphere.  That's because: 

  • it is NOT a measure of real wages.  It includes all income -- things like pensions, dividends, and social security.
  • it includes ALL households, not just those headed by workers. A household of full time students is included.  Your 85 year old grandparents are included. A household where one or more persons is unemployed is included.  A household where one spouse stays home to raise the children is included.
  • it is subject to distortions from demographics.  In particular, since retirees tend to have only about half the income of households headed by wage or salary earners, as the percentage of households headed by retirees rises (due to both healthier longevities and Boomer retirements), downward pressure is placed on the median. Below is the graph of current US demographics, showing the barbell effect of young Millennials and old Boomers bracketing the smailler Gen X:

Another problem with the metric is that it is only reported once a year, and with a nine month delay to boot. So this week's data release tells us what household income was for the period of 9 to 21 months ago! Not exactly timely.

Fortunately, there are several ways to get more timely data.

First of all, a decent back of the envelope estimate can be made by taking average hourly wages, which are reported monthly, multiplying by the number of hours worked, also indexed monthly, and dividing that by the entire population age 16 and over. It's an average, rather than a median, and it won't give you an exact number but will give you the overall trend.

Even better, Sentier services calculates an estimate of actual median household income monthly based on the Household Survey reported each month by the Census Bureau (that's the report that gives us, e.g., the unemployment rate). Doug Short has done excellent work putting this in graphic form each month.

Back before the big decline in gas prices had the result of driving real, inflation-adjusted wages to new highs, I would constantly read how real median household income showed that wages were actually declining. That was hogwash.  Now that real wages are at new multi-decade highs, there's a whole new round of hogwash!

But, enough background. Let's turn to the actual numbers.  

As you no doubt already know, real median household income at long last made a new all-time high in 2016, finally surpassing its previous highs in 2007 and 1999:

That is unadulterated good news.

Further, the official Census Bureau number was very much in line with Sentier's monthly reports for 2016. Here's Doug Short's aforementioned graph:

The average number for the 12 months of 2016 was higher than any previous year. This is the second year in a row that the very timely monthly reports by Sentier showed strong increases in real median household income, and were later confirmed by the official numbers. In other words, Sentier has a very trustworthy record and you should be paying attention if you care about this metric.

Digging a little deeper, here is how real median household income as broken down by quintiles, as well as the top and bottom 10%, since its previous 1999 peak (h/t Wall Street Journal):

The bottom two quintiles have still not made up all of the ground lost since 2000, although the top 50%-60% have.  On the contrary, the very top 10% have been doing extremely well (which has led to some earth-shaking political consequences on both the left and right).

Another legitimate caveat is that the Census Bureau changed its methodology 3 years ago, and regrettably has not published its results for both methodologies in order to create a baseline correlation for future use.  We know that three years ago, the change in methodology made the number *for that year* about 3.2% higher. Hence the break in the lines at that time period.  Is there a similar issue with regard to this year? Nobody knows for sure. But, yes, because of this we do have to put an asterisk next to the claim that 2016 was a new all-time high.

Yet another legitimate caveat is that real median household income for men only is still below its peak from the early 1970s (h/t Mike Shedlock):

All of the peaks since then, including the new peak for 2016, are in part because women entered the workforce, and thus the income of households where both spouses work has gotten higher.  But of course this is a real tradeoff if one of the spouses would prefer to stay home and raise the kids, but feels they have to work to make ends meet.

It is also perfectly fair to point out that the new highs in income last year don't do anything to erase the many years of lesser income in particular since the beginning of the Great Recession.  This means that median household *wealth* is still below what it would have been had we been at or near full employment for all of those years. In other words, the long-term well being of the median American household is still compromised.

Finally, it wouldn't be a true positive report without its very own batch of Doomer hogwash.  This year's hogwash is that the increase only happened because people had to work longer hours.  I'm not sure who originated it, but here are two links:  here and here, with the relevant quote:
[T]he Census Bureau data show that the bulk of the gains in real income in 2016 was explained by one factor: higher employment. In other words, hours worked rose but wages did not. The members of American median households are working harder at more jobs to finally get an increase in incomes.  
In other words, hIs logic runs: 
1. real median household income mainly rose because of more employment.
2. that means hours worked rose.
3. that means people were working more hours.
4. that means that household income really only increased because people had to work more hours for the same hourly pay.

Did you see what he did there?  He backed out the fact from line 1 when he got to line 3. Line 3 is true  in the aggregate, but he treated it as if it was true for most individuals in the set. The true line 3 is as follows:
3. that means that aggregate hours increased, due to unemployed people finding work, part-timers getting more hours, and some part-timers getting full-time employment.

Oh, that's a little different.

The bottom line is: 2.5 cheers for the new high in real median household income for 2016. That a majority of US households are earning more than that group ever did before is great news.  But, as evidenced by the last 15 years of this statistic, it by no means erases the long-term decline in the health of what used to be called the American middle class.