Scott Sumner  

The middle class is doing fine

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When I start reading an article there are a few red flags I look out for. If the writer starts discussing income inequality data as if it tells us something useful about economic inequality, I know I can pretty much ignore anything the author has to say. The same is true if the author claims that the middle class has seen declining living standards since the 1970s. Anyone old enough to remember the 1970s (like me) knows that isn't true. One big problem in both areas is that people tend to ignore the relationship between age and income. People often have low incomes when they are young or old, and higher incomes when middle-aged.

Scott Winship has an excellent article discussing some of the problems with income data. If you look at total income plus benefits adjusted for taxes and transfers, then real incomes for the middle quintile rose by 36% between 1979 and 2010. (Think of this quintile as roughly the median income.) Pessimists point to the fact that this gain in purchasing power was almost entirely due to taxes and transfers, and that wage and salary income actually fell for middle income Americans, in real terms. But Winship points out that this is highly misleading, as that decline is entirely due to the rapidly growing number of retired people in the middle quintile. Because those people rely heavily on non-wage income, it makes it look like wage and salary income for the middle class has done very poorly since 1979. Here's Winship:

The growth of elderly households is the entire reason that wages and salaries detracted from income growth and that taxes and transfers accounted for nearly all of the growth. People in such households grew from 15 percent of all people in the middle fifth in 1979 to 26 percent of them in 2010. It is not just that the retiree population has grown--thanks to Social Security and Medicare, the number of retirees in the middle fifth specifically has grown much faster than their rate of growth in the general population.

Wages and salaries are the single biggest factor explaining income growth for those middle class families living in households with children. Wages and salaries are nearly as important for childless nonelderly households.


Winship also notes that some pessimists argue that we should look at how incomes are doing net of taxes and transfers, as that's an indication of how well the free market system is serving Americans. That reminds me of the first time I ever challenged a professor in class. I was a sophomore at Wisconsin, taking intermediate price theory. The professor (who also worked at the Poverty Institute) made a similar argument---that income net of taxes and transfers shows how the free market would distribute income. I made what I thought was a pretty obvious point. If we didn't have all those transfer programs then wage and salary data would look very different. Indeed before we had welfare and Social Security the poor and elderly used to work at a much higher rate then they do today. Those programs might be beneficial, but it's absurd to assume they don't impact wage and salary incomes. Thus incomes net of taxes and transfers do not provide any sort of indication of what sort of income growth you'd expect in a free market economy.

I highly recommend reading the entire Winship article, and all of his other articles on income.

PS. You can make a good argument that middle income living standards have declined somewhat since 2007, but that's a different issue.

HT: David Levey


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CATEGORIES: Income Distribution



COMMENTS (13 to date)
Brett writes:

I pointed out to Winship on twitter that the gains in non-elderly household income may not reflect rising wages so much as it may reflect greater work hours by working household members (particularly women). His reply was that this was tied to supposed labor rents among working-age men in the Postwar Period being wiped out, but that doesn't seem to refute the point being made.

Tony Tang writes:

It is very interesting to note how the increase in technology also increased the amount of retired people. This is an interesting thought, that people being alive longer than before would lead to problems in identify the state of the middle class. This leads me into thinking that perhaps these ideas of middle class not doing well are perhaps misleading.

T writes:

I wonder if I can guess who the prof was... :)

Curtis L. writes:

Sorry, but your title is incorrect. The middle class is far from fine. I speak from experience.

Urstoff writes:

Your title is correct. The middle class is fine. I speak from experience.

Scott Sumner writes:

Brett, I'm very skeptical of the idea that society as a whole works harder than in 1979. But this is a very complex issue involving male/female differences, substitution of hired labor for homemaking, consumption occurring at work (surfing the internet) and lots of other factors. Indeed I'm even skeptical of our ability to measure real incomes, as that requires us to measure inflation, which we don't really know how to do.

Tony Tang, We don't have more retired people because we live longer, but rather because we are richer.

T, Good luck, it was 1974. I didn't mention the name because he was a very good guy, and graciously acknowledged my point.

Curtis, Not sure what experience you might have had that would have any bearing on my claim that on average the 60 million members of the US middle quintile are doing fine, or even that the 300 million self-identified middle class people are doing fine.

Curtis L. writes:

Scott, My experience is I am an individual that makes up part of the middle class. I work with nothing but individuals who make up part of the middle class. I attend a church the majority of whose members make up part of the middle class.

We are not doing fine by any stretch.

Stagnant or deflating real wages are taking their toll.

Very easy to look only at statistics from a professorship. Lived experience is a whole 'nother ballgame.

Scott Sumner writes:

Curtis, I've known many middle class people, and I've observed middle class living standards rise substantially since the 1970s. It's obvious that what is today viewed as a "normal" middle class lifestyle is much better than in the 1970s.

I also wonder what proportion of the 60 million people in the middle quintile you have known personally. What makes you think they are representative?

KPres writes:

@Brett

The influx of women into the workforce is nowhere near as dramatic as most people assume. In the mid-50s, women represented about 30% of the labor force, whereas today they represent about 45%. However, over the same period the average work week for all workers has declined from ~40 hrs/wk to ~32 hrs/wk. Given those two facts, I bet if you ran the numbers you'd find that the average weekly hours PER HOUSEHOLD has not increased significantly.

SG writes:

@Curtis L

I think Scott actually agrees with you. He said that *long-term* living standards have likely gone way up, but acknowledged that may not have been true over the past 6 years.

However, solving our post-Lehman economic troubles has been Scott's raison d'ĂȘtre ever since he started blogging. If you carefully read what he says, you just might find an actual policy prescription (NGDPLT) that would bring enormous benefits to the middle class.

Joe writes:

The continued phenomena of job polarization would contradict the assertion middle class individuals are doing just fine.

Joshua writes:

As a member of the middle class, I can attest to Curtis' point that the last few years have kinda sucked with regard to growth. On the other hand, I'd still rather be a 3rd quintiler in 2014 than a 4th quintiler in 1974 (or pick your year in the 70s).

T writes:
T, Good luck, it was 1974. I didn't mention the name because he was a very good guy, and graciously acknowledged my point.

I was about to follow up my post: I guessed 1980 (I studied econ there in the mid 90s and sure got my money's worth). It probably wasn't who I'm thinking of -- both excellent economists who taught there in 1974.

I wanted to add that the prof. did have a point, just not as solid as he probably thought when saying it , as you said he graciously acknowledged.

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