On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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- What Does Median Household Income Really Mean?
What Does Median Household Income Really Mean?
New income data released by the Census Bureau on Tuesday has been the topic of considerable news coverage for the past few days. Much of the discussion has centered on the fact that real (adjusted for inflation) median household income has fallen since 1999. Many suggest that this is a sign the economy is not lifting all boats.
While it may be true that not everyone has gained since 1999, we must note that there are a myriad of factors that determine median household income, and the picture created by this data is not as simple as it seems.
One factor that can complicate the picture is marital status. When a couple gets married, they are now counted as one household making the total income of two individuals rather than two poorer households making lower incomes. (This same problem exists when using all tax returns data because when a married couple files a joint tax return, the couple is counted as one taxpayer, not two.) If every dual-income married couple got divorced, even if their individual incomes stayed the same, the country’s median household income would plummet because the newly-single earners’ incomes would be lower than their previous jointly reported incomes.
We can see evidence of this factor in the comparisons between 1999 and 2005. The table below details how median household incomes in various types of households changed during that period. One- and two-earner households saw increases in median nominal incomes of 17.5 percent and 19.5 percent, respectively, compared to an increase of only 13.5 percent for all households combined.
When we look at inflation-adjusted incomes, we see that households with more earners once again fared better than households with fewer earners. The CPI-U (a measure of consumer price inflation) increased by 17.2 percent from 1999 to 2005, leading many to point out that real median household income for all households has fallen by 3.7 percent (13.5 – 17.2 = -3.7). However, as we can see in the last column in the table, real median household income for one-earner households has actually risen by 0.3 percent, and real median household income for two-or-more earner households has risen by 2.2 percent.
|Category||Percentage of Households Falling into Category in 1999||Percentage of Households Falling into Category in 2005||Median Household Income in 1999 within Category||Median Household Income in 2005 within Category||Percentage Change in Median Nominal Household Income||Percentage Change in Real Nominal Household Income|
|All Households||100 %||100 %||$40,816||$46,326||13.5 %||- 3.7 %|
|Households with No Earners||19.6 %||21.2 %||$15,405||$16,893||9.7 %||- 7.5 %|
|Households with One Earner||35.0 %||36.8 %||$31,948||$37,541||17.5 %||0.3 %|
|Households with 2-or-more Earners||45.4 %||42.0 %||$63,021||$75,293||19.5 %||2.3 %|
|Sources: Census Bureau and Bureau of Labor Statistics|
How could it be that the two largest groups, households with one earner and households with two or more earners, both saw their incomes grow faster than the overall household median? It is largely because the percentage of households in the one-earner and no-earner groups, where income is traditionally lower, has risen from 54.6 percent to 58 percent. This increasing ratio of zero- and one-earner households to two-or-more earner households pushes down the overall median.
To make this phenomenon clear, let’s look at a hypothetical example. Suppose we have 5 people in an economy: Homer, Ned, Edna, Marge, and Maude, all of whom work and are unmarried. Homer earns $20,000; Ned earns $30,000; Edna earns $40,000; Marge earns $50,000, and Maude earns $60,000. The median household income would be $40,000 (Edna is the middle value).
But now suppose Homer and Marge get married and Ned and Maude get married. We now have only three households: (1) Edna by herself at $40,000, (2) Homer and Marge making $70,000 in household income, and (3) Ned and Maude making $90,000. Now the median household income is $70,000. No individual person’s income has changed, but we have a higher median income. We would never say that the economy is improving in this situation although median household income is rising.
If Homer and Marge divorce, we will have four households earning incomes of $40,000, $20,000, $50,000, and $90,000. The median has now fallen from $70,000 to $45,000. Again, we would never say that the economy is faltering in this situation although median household income has fallen.
When we analyze household-level data that combines different types of households, we must take into account changing household structures. Shifts in the number of household earners can significantly impact median household statistics, and failure to take this into account can create a distorted picture of income distribution.
Links: 1999 Census Income Data (courtesy of 2000 March CPS March Supplement); 2005 Census Income Data (courtesy of 2006 CPS March Supplement); Bureau of Labor Statistics CPI Data (click on "All Urban Consumers, Current Series")
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