The myth of income stagnation

According to the conventional wisdom, income stagnation and inequality are large and growing threats to broad-based prosperity in the United States.

Many economists, journalists, business leaders, and elected leaders (from both parties) believe that for a large share of households, real (inflation-adjusted) income has not increased for decades, and that income inequality – the gap between higher- and lower-income households – has grown substantially in recent years.

Casual observation might make the claim that incomes have been stagnant for decades seem implausible. After all, just look at what a typical household consumes in 2022 compared to, say, 1992.

Advances in medical care, safer automobiles, the spread of smartphones, video conferencing with friends and family, and higher-quality home appliances are just a few examples of the significant consumption gains over those decades. Could this material progress really have coincided with stagnating incomes?

Relying on anecdotes and intuition to compute economic trends can work sometimes, but it can just as easily lead one astray.

Fortunately, we can find clarity in statistics released last month by the non-partisan Congressional Budget Office – the referee in US economic policy debates – which confirm that the conventional wisdom is off-base.

According to the CBO, median household income from market activities – labour, business, and capital income, as well as retirement income from past services – was not stagnant from 1990 to 2019. Instead, after adjusting for inflation, it grew by 26%. This is in line with wage growth. By my calculations using Bureau of Labour Statistics (BLS) data, inflation-adjusted average wages for non-supervisory workers grew by around one-third over this period.

Moreover, a more comprehensive measure of the flow of financial resources available to households for consumption and savings helps to account for the non-market income they received and for the taxes they paid.

After factoring in social insurance benefits (from Social Security and unemployment insurance, for example), government safety-net benefits (such as food stamps), and federal taxes, the CBO finds that median household income increased by 55% from 1990 to 2019, which is significantly faster than wage growth and certainly not stagnate.

The bottom 20% of households enjoyed even greater gains, with market income growth of 51% and after-tax-and-transfer income growth of 74%.

What about inequality? Here, the CBO computes the size of the gap between higher- and lower-income households using a standard statistical measure that accounts for the entire distribution of income (the “Gini coefficient”). While inequality of post-tax-and-transfer income did rise by 7% from 1990 to 2019, all the increase occurred between 1990 and 2007, before the explosion of political and media interest in inequality.

Since 2007, inequality has fallen by 5%.

Why is there such a wide gap between the data and the conventional wisdom? For starters, commentators often confound income growth in the 1970s and 1980s with the decades that followed.

Incomes were indeed stagnant during that earlier period.

The annual rate of growth for real median household post-tax-and-transfer income was over three times faster from 1990 to 2019 than it was from 1979, the year CBO’s data begin, to 1990.

The BLS’s wage data go back further. They show that consumer prices grew faster than wages from 1973 until 1976 – owing largely to the 1973 oil crisis – and from 1979 to 1981. Real wages for typical workers continued to decline throughout the 1980s. 

© Project Syndicate, 2022

MICHAEL R STRAIN

The writer is Director of Economic Policy Studies at the American Enterprise Institute.