Wednesday, May 28, 2014

Why Real Median Housiehold Income is the most misused statistic in the econoblogosphere

- by New Deal democrat

In virtually any discussion in the econoblogophere about the well-being of the middle and working class, you are bound to see reference to "real median household income" as proof that the average family is much worse off now than they were at the outset of the Millennium.  Everyone seems to know that real median household income peaked in 1999, never surpassed that figure during the Bush years, took it on the chin during the Great Recession, and has barely budged since. So wages have plummeted.

The problem is, what everyone seems to know is wrong.

Real median household income is compiled by the Census Bureau for all households headed by a person age 16 or older. NOT just wage/salary earners.  Households consisting of two retirees are included.  Households headed by somebody in college are included.  Households headed by one or two unemployed person are included.

So, real median household income does not tell you what is happening with salaries and wages.  It is in no way "proof" that real wages and salaries have been declining.  In fact, real wages and salaries have been essentially stagnant since the turn of the Millenium.  We know that because that's what the BLS quarterly report on median weekly earnings shows.

While the Census Bureau reports median household income only once a year, the data is collected each month by the Census Bureau as part of its Household Survey (one of two surveys included in the monthly jobs report). Sentier Reseach uses this to create a monthly update on median household income, which blogger Doug Short uses to update graphically.  At my request, Doug  (who creates some of the best economic graphs on the internet, and if you aren't  already, you should start reading him) put together two graphs comparing real usual weekly earnings with real median household income, and also to the employment to population ratio.

Here is the resulting graph, dating from the onset of the Great Recession at the end of 2007:

You can see the stark divergence between wages and household income at the end of 2008.  The huge increase in unemployment depressed median household income (and the E/P ratio), while those who kept their jobs actually saw their real wages increase, as gas prices declined from a high of $4.25 to $1.50 a gallon.  As a small bout of inflation rippled through the economy in 2010-12, due to gas prices returning to near $4/gallon, real median wages declined somewhat.  As the YoY comparisons of gas prices have since largely turned negative, real median wages have shown a slight improvement.

Now here is the same comparison, taken back to 2000:

This graph confirms that real median wages have largely been stagnant since 2000.  Further, note that the two time periods of the most divergence between real median household income and the E/P ratio, 2002-05 and 2009, the the two times when there were upward spikes in real median weekly earnings.

In summary, real median household income has been declining because of increased unemployment, and because of Boomers retiring in droves. (The first Boomers hit age 62 in 2012.  They have already caused an increase of 4.4 million in the total population age 65 and above to 43.9 million, and an increase as a percentage of the population over 16 over over 1% to 17.9%.  Retirement typically causes a decline of about 50% in the total income of households.)  Because of that, real median household income largely mirrors the employment to population ratio.

To reiterate, real median household income is the most misused statistic in the econoblogosphere.  Whenever you see a citation to it, you should examine the post carefully to see if the piece is using it appropriately to discuss income broadly including non-wage earning households, or is mis-citing it as evidence of a big decline in wages.