Stagnating Median Income

The chattering classes have been abuzz for the past year or so about stagnation in median income. What is the cause of this? Here is a quick review of some of the arguments I think bear considering.

1. Tyler Cowen argues that increases in median income come about through technological innovations that increase productivity, but we have picked the low-hanging fruit of such innovations, and future ones will come more slowly.

2. Too widespread to be associated with anyone in particular, but see Noah Smith, is the claim that it’s a consequence of outsourcing. That’s usually meant to indicate that there’s something wrong with outsourcing, but I would phrase it this way–the economic advantage the U.S. held for the first half-century following WWII inevitably eroded as other countries became more economically competitive.

3. Russ Roberts believes a lot of it has to do with the increase in divorce rates that began in the ’70s. Not only did you split apart a lot of households, it thrust a lot of women into the workforce without suitable skills, so mathematically that would drive down median household income.

4. Don Boudreaux passes on an argument from a correspondent showing that the number of households grew much faster than the increase in population in the 1970s and ’80s. That could be Roberts’ divorce effect, but the correspondent argues it also has to do with more retiree households (whereas they used to move in with their kids).

5. My own hypothesis. At least part of it was caused by the end of the influx of women into the workforce. Most people focus on median household income, so as women entered the workforce in increasing numbers (and increasingly at higher paying jobs) household income increased. When that trend was topped out (somewhere in the ’80s, I’d guess), the increases would, too.

Meanwhile (Alex Tabarrok produces graphs going beyond household income, showing that male median income began to stagnate in the mid-70s, while female median income continued climbing through the mid 2000s. How does that affect the validity of any of these theories?

And Russ Roberts (same link as above) asks what it really means to say that median income is stagnating, emphasizing that it doesn’t necessarily mean economic mobility has diminished or that our standard of living has not improved.

I would also ask if our expectations of continuously rising median income are inappropriately based on the assumption that a specific economic time-period was the norm, rather than an unusual time?

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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5 Responses to Stagnating Median Income

  1. James K says:

    I wonder how much of it has to do with healthcare.

    Income is generally measured without counting benefits, and the cost of healthcare (most of which is paid for by employers in the US) keeps rising. This cost must ultimately be borne by the worker, so as healthcare gets more expensive, the greater nominal value of the benefits package comes at the expense of cash pay rises.

  2. James Hanley says:

    Ah, yes, I forgot that one. It incorporates not just health care, although that is the largest chunk of it, but benefits in general, and argues that they have increased, hiding what is a real increase in median income by taking part of it in non-wage form.

  3. I disagree with Cowen here (or at least I disagree with your presentation of Cowen’s viewpoint.) By all indications, the speed of technological progress is increasing.

    Also, income is increasingly becoming an insufficient metric for well-being: look at all the free knowledge and savings I get for free for just 29.99 a month to Comcast or whatever!

  4. James Hanley says:

    Christopher,

    Cowen’s argument is that the type of technological advances that gives us big gains in productivity–big big big advances–aren’t happening right now. I’m not sure he’s right, but want to specify that he’s not saying technological advances per se aren’t happening.

  5. I’d say he’s totally wrong. Part of the recession is that we can’t figure out what to do since everything is so easy to get.

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