Americans Are Getting Bigger Paychecks
Earlier this year, the U.S. Census Bureau delivered some good news. Finally, after years of what seemed like a sluggish and uncertain recovery, American incomes were rising strongly again. Median household income jumped by more than 5 percent in 2015, and the lion’s share of the gains went to middle-class and lower-income folks. Employment rose strongly, and poverty fell faster than it had in any year since the 1960s. The gains were felt in both cities and rural areas.
What’s more, every age group had gains. Overall income statistics are muddled by the aging of the population. As economist Robert Shapiro has shown, the years from 2013 onward have lifted the incomes of boomers, Gen Xers, and millennials at rates that compare favorably to anything seen since 1980:
Young people’s income tends to rise at all times, even in recessions, because they're are climbing the career ladder and learning how to navigate the business world. The U.S. recovery since 2013 has been about average for these workers. Middle-aged people’s incomes usually stagnate or fall, even in expansions, because they tend to be at the peak of their careers already. But this recovery has been so good that it has even raised the incomes of households headed by older earners.
Of course, this isn't a perfect comparison, because earlier expansions lasted many years, while this one is only three years old. If a recession comes soon, then this business cycle will have been very underwhelming, given the size of the Great Recession years from 2007 to 2009 and the slow growth that followed.
But there’s a possibility that good things have been happening in the economy for even longer. Gary Burtless, a researcher at the Brookings Institution, has suggested that the Census Bureau’s data has been understating income gains since the early 2000s. The Commerce Department’s own measure of income, which used to agree almost exactly with the Census numbers each year, has risen much more strongly for a decade-and-a-half.
The difference is substantial. By the Census’ measure, median income is still below its pre-recession peak. But by the Commerce Department’s numbers, income is the highest it has ever been. If Commerce is right, the Great Recession wasn’t quite as horrendous as we thought, and the recovery has been even stronger.
So for now, at least, things are going well in the U.S. economy. Why is this happening?
It isn't because growth is fast -- in fact, it’s a bit slower than in past recoveries. Investment has recovered from its recession lows, but still hasn’t matched the torrid numbers of the 1990s and early 2000s. Consumption is about the same as in the previous decade.
Instead, what’s happening is a shift in who gets the money. Since 1980, growth has tended to benefit the rich a lot more than the middle class, and the middle class a bit more than the poor. In the last few years, that trend reversed. Though everyone has gained, the poor and middle class have done the best:
Pre-capita gross domestic product is strongly affected by how much top earners make. But median household income measures how much the average person is taking in. That makes it a better number for gauging the economic well-being of the bulk of Americans. When the country becomes more equal, as has been happening in the past few years, median numbers can go up strongly even as per-capita numbers slow down.
Why is inequality falling, when for so long it seemed to go only in one direction? The short answer is that no one really knows. It hasn’t been happening for long enough for us to investigate the causes, and economists don’t have very solid theories of what determines inequality in the first place.
There’s some possibility that the change has to do with the structure of the economy. Many of the trends that defined the pre-2008 economy, like globalization and the growth of the finance industry, have now halted and gone into reverse. Many people blame these forces for inequality in the long term, so it’s at least conceivable that their ebb has resulted in a reprieve for the American poor and middle class. But economists don’t really understand how these big trends affect wages, so this is really just speculation.
The real message is that economists should be working to figure out what has been going right since 2013, and how to replicate it. For the first time in many decades, America is starting to show signs of becoming a less unequal country, even as growth resumes. That’s something everyone should hope continues.
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