The Best Data on Middle Class Decline (Updated)
by Kenneth Thomas who writes The Middle Class Economist
(corrected author name)
The Best Data on Middle Class Decline (Updated)
The flurry of posts earlier this month on middle class decline (me, Lane Kenworthy, Matthew Yglesias, Kevin Drum) made me think some more about what the best way is to show what’s happened since the peak of real wages in the early 1970s. While in my opinion there is no perfect measure, there are a lot of choices to be made, and I argue below why real wages for production and non-supervisory workers, with an adjustment for non-wage compensation, is the best single measure.
Choice 1: Household/family vs. individual
While we all live in households or families, over the past 40 years, there has been a decline in persons per household (see Kenworthy) and an increase in incomes per household as women’s labor force participation has increased. The decline in persons per household means that a household needs less income than in the past to have a fixed per capita income. The increase in incomes per household has meant that households have had higher real income even as real individual income has fallen, as pointed out by commenter peggy_Boston in the comments thread of Drum’s article. To my mind, this is partly causal; that is, because real wages have fallen, families have had to have more incomes in order to maintain their living standards. Indeed, falling real wages have forced families to run up high levels of debt, with non-mortgage debt reaching 1/3 of family income by 2005. Therefore, I think individual data is the right choice here.
Choice 2: Median income vs. production and non-supervisory workers’ income
The median (middle value, with an equal number of observations above and below it) has big advantages over the arithmetic mean in trying to show the typical situation in a distribution of values. It is especially useful for income distributions, where the presence of very high incomes means that the mean is much higher than the median. In fact, the literature on “decoupling” (see Kenworthy above) demonstrates just how much this is the case. But I think that “production and non-supervisory workers” captures our intuition about who is in the middle class even better than the median does.
This series, in Table B-47 of the Economic Report of the President, is an average of the earnings of employed persons in private (non-government), non-agricultural jobs. It includes about 80% of the private workforce and 64% of the total non-agricultural workforce. Despite being an average, its exclusion of supervisory workers means that virtually all of the extremely high values that distort the mean of the entire workforce are eliminated. It is, essentially, the mean income of the bottom 80% of private workers. The biggest drawback to this dataset is that it does not include non-supervisory government workers, but I think that is outweighed by its broader coverage of the middle class than the pure median income (or middle quintile, as in Kenworthy’s post).
For the counterargument, that changes in composition of production & non-supervisory workers can cause distortions that the median wage is not subject to, see Dean Baker (p. 9).
Choice 3: Weekly vs. hourly
Baker mentions hourly earnings rates in some cases. As I discussed in the comments section of my March 11 post, the decline in hours worked per week (from 36.9 hours in 1972 to 33.6 hours in 2011) suggests to me that we need weekly, not hourly, wages.
Choice 4: Which inflation data to believe?
Shortly after President Clinton’s first election, I predicted to my students that, because his message of middle-class stagnation (“It’s the economy, stupid”) was dependent on how inflation was measured, that conservatives would soon attack the official Bureau of Labor Statistics inflation data. The issue is, if inflation is overstated, then the decline in real wages reported by the BLS could be overstated or even non-existent. Conversely, if BLS data understates inflation, then real wages have fallen even faster than shown in Table B-47.
Unfortunately, I did not publish this prediction, so you’ll have to take my word for it that I predicted the attack on inflation data that culminated in the Boskin Commission in 1995. I always took this to be a political attack rather than a scientific one. My attitude has always been that trade theory (i.e., the Stolper-Samuelson Theorem; see Ronald Rogowski’s great book Commerce and Coalitions for an explanation of this topic, which I intend to discuss in a later post) predicts that real wages in a relatively labor-scarce country like the United States will fall as trade expands, and the data shows that real wages indeed fell: so what reason do we have to question the data? In the end, though, the Commission concluded that inflation was being overstated by about 1.1 percentage points a year, and the BLS was mandated to adjust its methodology.
Barry Ritholtz takes an even more jaundiced view of the Boskin Commission than I do. Paul Krugman, on the other hand, is not convinced that inflation is now significantly underreported, citing the work of the Billion Prices Project. For the moment, I do not see reason enough to toss out the BLS data, despite the possibility that the Boskin Commission may have introduced distortions into it.
Choice 5: Wages vs. compensation
Martin Feldstein and other economists argue that it is not sufficient to look at wages alone, because the non-wage share of compensation has been growing over the past few decades. As I posted before, total employee compensation includes everyone from the CEO to the janitor, so it overlooks the fact that the top 1% have made almost all the gains from decades of economic growth. Nevertheless, it is clearly true that non-wage compensation has grown faster than wages, as we will see below. In fact, Yglesias suggests that the 2000s actually saw real compensation growth at the median, but it was all in the form of health insurance benefits. Of course, there is some debate over how much value actually comes from extra employer payments for health insurance, as Baker’s paper (p. 10) details
A different way to factor in compensation that I had seen before on the Economic Policy Institute’s website was explained to me in an email by Jared Bernstein and is documented in the footnote of his blog post here. It takes the ratio of total compensation to total wages, both of which are in National Income and Product Accounts Table 1.12 (you can set it to a wider range of years, as I did). Whereas he applies it to median wages, I apply it to Table B-47 and get the following results:
Year Weekly Real Earnings Comp/Wages Weekly Compensation
(1982-84 dollars) (1982-84 dollars)
1972 $341.83 1.14 $388.01
1975 $314.75 1.16 $366.63
1980 $290.86 1.20 $348.93
1985 $285.34 1.22 $347.10
1990 $271.12 1.21 $328.99
1995 $267.07 1.22 $326.23
2000 $284.79 1.20 $341.49
2005 $284.99 1.24 $352.87
2010 $297.67 1.24 $370.28
2011 $294.78 1.24 $365.77
Note: Last two columns rounded from spreadsheet calculations
Sources: Economic Report of the President 2012, Table B-47, National Income and Product Accounts, Table 1.12, and author’s calculations
By this measure, compensation in 2011 for most workers was still almost 6% below its 1972 peak. The advantage of this adjustment over Feldstein’s procedure is it strips out the wage inequality of the compensation data, although there is still some overstatement based on inequalities in non-wage compensation. Still, I think this gives us our most accurate picture of what’s happening to the bottom 80% of workers.
That is not to say that this is a perfect measure even with those caveats. It matters what is happening at the top, too. If high wage earners were seeing their income fall faster than middle-class workers, then inequality would be falling and we would probably object less to what would then look like the much-vaunted “shared sacrifice.” But of course, as Kenworthy notes, the share of the top 1% more than doubled from 1979 to 2007, from 8% to 17%. With inequality rising as it is, we now seem to be in danger of a consequent sharp shift of political power to the 1%, as MIT economist Daron Acemoglu told Think Progress’ Pat Garofolo.
I look forward to your comments, especially if I’ve gotten something wrong.
UPDATE: By way of comparison, here is Lane Kenworthy’s chart.
In it, you can see that by either median family income or 3rd quintile household income, incomes started rising shortly after 1980, whereas in my table compensation-adjusted real wages continued to fall until 1995. You can also see the divergence in median family income and Q3 household income between 2000 and 2007, as noted by Yglesias. Whereas the increase is made up entirely of nonwage compensation in the Q3 household income series, in my table at the individual level we have an increase made up partly of wages and partly of nonwage compensation.
You really can’t separate cause/effect when looking at the rise of two earner families. To some extant, the decrease in children per household and technological improvements inside the home (eg microwaves and frozen food) have made it easier for women to work outside the home for wages rather than in it. So women are ABLE to work outside the home effectively means that households are forced to have women work outside the home. And of course women are more able to divorce their husbuds if they can earn reasonable wages outside the home. So household incomes show what people are able to spend, but you HAVE to look at hours worked per household to see how much more difficult it is for them go get those wages.
Jim:
Dr. Elizabeth Warren did a report “The Coming Collapse of The Middle Class” which touched upon some of the issues you cite. While more women did go to works from the seventies onward; the additional income did not result in increased savings which one would expect in the end. The additional income was eaten up by such things as:
– Child Care outside of the home (nothing to compare to in the seventies and added cost)
– Additional costs of owning a car which results from living in suburbia.
– The increased costs of owning a home resulting from mortgage rates. (Also the average home earlier in the 2000 decade was still 6.1 rooms (HUD) and not the McMansions so many tend to tout.)
– Increased taxes on the 2nd earner income which starts with the first $ made from the 2nd income.
– Healthcare Costs which have increased in double digit fashion since Hillarycare was proposed.
I would also argue that it is not so easy for a woman to divorce as many families with a single income earner slip backwards in income mobility. Women as the heads of families make up the larger portion of those living in poverty. In the end, it is almost impossible not to be a two income family if one wishes to maintain.
Tom Hertz (Mobility in America 2006) also touches on many of the issues stopping people from moving up the ladder. For example, if you are born into the lowest quintile of incpome; the chances of advancing upwards is greatly diminished than if you were born into a higher income bracket. It becomes more difficult for minorities who tend to have a higher percentage in the lower income brackets.
Ken:
Welcome to Angry Bear. A nice read. I left my comments with Jim A.
Remember when Reagan, during his second campaign asked: Are you better off today than yesterday?
Everyone was saying yeah. We’re doing great. I thought, you fools, you are doing great because you have two people working. But, all they saw was a larger gross household income. They never thought about what it was taking to do it.
It was the beginning for the privatization of child raising for the masses.
Thanks for the welcome and for your comments. You make a lot of good points I basically agree with.
Daniel:
He was an actor also and one of his big hits was “Bedtime for Bonzo.” Ronny attempted to teach human morals to a chimp. He didn’t succeed in real life so he moved on to politics as the president where he succeed in teaching masses of the population his morals. Reagan started the downward slide.
http://www.youtube.com/watch?v=sO53AXUdeV0
Very interesting post. Thank you. But the data can mean so many things. It is hard for me to translate what you show into policy goals. E.g., the decline in the 1970s may well have been due in large measure to women entering the workforce. Would we want to reverse that trend? Another part of the decline or relatibve stagnation may be due to international competition. Would we want to adopt protectionist policies?
Questions: To what extent has the pool of non-supervosory workers changed? How have the jobs changed? Are there, perhaps, more supervosory workers (as a percentage of the workforce) today?
The BLS does not publish data on non-supervisery workers share of the labor force.
But a few years ago I obtained the data from them .
It has bounced around 60% of the labor force–
–bottoming at 58.2% in 1982.
–peaking at 62.1% in 1995.
–it was 60.1 in 2005, the last data point I have.
I wonder at the quest for a single best measure. It strikes me as a bit like the debate over core vs headline inflation measures. The point to having a variety of similar measures is that we can gain more insight by comparing them, and understanding how they differ.
In fact, don’t we see stagnation in middle-income incomes over a wide range of measures? Assuming that’s right, doesn’t that give us more confidence, rather than less, in claiming stagnation to be reality, and not just a quirk in one data series?
The exercise is a good one to the extent it reveals the strengths and weaknesses of each data series, but I’m not sure carrying it to the point of prefering a single measure to a variety of measures is helpful.
I would never argue that divorce (at least with children) has become easy. But for many, increased access of women to the labor market took it from agonizing poverty to difficult straits. Certainly many of the expenses that you cite mean that the utility of a second income in a household is rarely as great as the first. But people still perceive that utility as greater than zero. And I probably should have emphasized the importance of the pill. Routine availability of effective birth control has led to a marked decrease in the number of years the average household has children below the age of school attendence. That leads to an increase of the number of years when no childcare expenses are generated by a second wagearner. It is also true that the second income is usualy at a lower rate, and the job is less secure.
Of course most people’s propensity to spend is limited by their household income and access to credit, NOT individual income. ISTM that as the (limited by the factors that you and EW have noted) benefit of a second household income has petered out, an increase in the avaia bility of credit has been used to augment household income with predictably negative long term consequences.
I would never argue that divorce (at least with children) has become easy. But for many, increased access of women to the labor market took it from agonizing poverty to difficult straits. Certainly many of the expenses that you cite mean that the utility of a second income in a household is rarely as great as the first. But people still perceive that utility as greater than zero. And I probably should have emphasized the importance of the pill. Routine availability of effective birth control has led to a marked decrease in the number of years the average household has children below the age of school attendence. That leads to an increase of the number of years when no childcare expenses are generated by a second wagearner. It is also true that the second income is usualy at a lower rate, and the job is less secure.
Of course most people’s propensity to spend is limited by their household income and access to credit, NOT individual income. ISTM that as the (limited by the factors that you and EW have noted) benefit of a second household income has petered out, an increase in the avaia bility of credit has been used to augment household income with predictably negative long term consequences.
I would never argue that divorce (at least with children) has become easy. But for many, increased access of women to the labor market took it from agonizing poverty to difficult straits. Certainly many of the expenses that you cite mean that the utility of a second income in a household is rarely as great as the first. But people still perceive that utility as greater than zero. And I probably should have emphasized the importance of the pill. Routine availability of effective birth control has led to a marked decrease in the number of years the average household has children below the age of school attendence. That leads to an increase of the number of years when no childcare expenses are generated by a second wagearner. It is also true that the second income is usualy at a lower rate, and the job is less secure.
Of course most people’s propensity to spend is limited by their household income and access to credit, NOT individual income. ISTM that as the (limited by the factors that you and EW have noted) benefit of a second household income has petered out, an increase in the avaia bility of credit has been used to augment household income with predictably negative long term consequences.
The basic problem is that what you are calling the “middle class” is really the working class. The inability to face this fact distorts all US politics. Very few people belong to the actual middle class, very small business owners, physicians, lawyers, detists and academics. You can argue about K-12 teachers, but the rest, police, fire, garbage collectors, autoworkers, garage mechanics and store clerks are working class who have very little control over their work assignments and are employed at will.
Calling such people “middle class” distorts their reality, often self distorts.
This is share of total (non-agricultural) labor force, right? Not the private labor force? I remember calling up BLS in the early 1990s and being told production and non-supervisory workers were about 80% of the private labor force and 62% of the total labor force, which dovetails well with the 62.1% figure you give for 1995.
Do you have some contact info at BLS handy? If so, could you send it to me at kthomas55@hotmail.com? Thanks!
Certainly multiple measures strengthen our confidence in a trend and, as I said, this isn’t a perfect measure either. But I think talking about “stagnation,” as you do, misses a deeper trend, which is actual decline. That may suggest that the most important choice is between individual and family or household measures.
This is better than Kenworthy’s because “income” which he uses includes too much in the way on, at the lower end, transfer payments, and at the upper end, investment income, that are distorting on this issue. Even if his conclusions resemble yours, which appears to be the case this focus on comp for work in middle class context is still the better one.
It’s interesting to note that, if you adjust for the 10% drop in average weekly hours, the total comp per hour has actually slightly risen.
Eli:
I would agree with you to the extent that Median Household Income is not Middle Class althought it is in the middle. It appear many people refuse to give up the name and recognize they have slipped under the distinction. If one were to look at the AMT, when it came into existance, what income it was put in place to cover, and what it represents now in income; projecting forward for the other brackets, one would find most incomes have slipped in comparison while the AMT incomes have gone well beyond.
Middle Class exceeds $100,000 annually.
I wasn’t attempting precision when I used “stagnation”.
It ain’t nothing to distinguish between “not up” and “down” if you are on the receiving end of the pay check, but for the purposes of understanding how the economy is changing, what’s policy driven, what’s driven by developmets elsewhere – then knowing “not up” from “down” in an economy with rising productivity and rising inequality doesn’t really add much beyond a bit more urgency.
Not in political discourse, where if you use income it is somewhere north of 25K$, As I said a better definition is the ability to determine one’s own tasks
Weekly hours have fallen because there is no overtime