Real Household Income

A recent GEI News article discussed a New York Times article about the dramatic decline in median real household income during and after The Great Recession.  The question was not addressed about the historical context of these recent numbers.  That is the purpose of this article.  The data available from the St. Louis Fed data base goes back to 1967.

There are really three periods of unique behavior for real median household income:  1967-1982, 1983-1999 and 2000 -2011.  This quite evident in the following graph:

We will skip all the political drivel about how good Reagan and Clinton were for the economy and ask the question:  Why, really, did the “Golden Years” occur? The first couple of years (1983 and 1984) can be attributed to the “natural” rebound that used to be seen in personal incomes after a recession ended. The years 1985 -1999 are the years of the computer revolution which ended with the dot.com bubble. There is nothing like a booming new economic activity to boost personal incomes, along with many other desirable economic events.

What other changes were occurring in the late 1980s and the 1990s that might have contributed to the two extraordinary surges in real household income. An obvious possibility is demographics. Two possible effects here would both affect the labor participation rate, which in turn would be expected to push household incomes higher: (1) More two income households as more married women worked and (2) A population bulge of working age people as these were the years when all of the baby boomers were over 20.

Number of Married Women Working

Lets look at the women working first. In the following graph we see that the number of married women working was growing much faster than married men.

We can see that the bulk of the difference in rate of employment growth occurred before the mid 1980s.  The slopes of the two curves for the “golden years” are nearly identical.  The fact that a disproportionate increase in the number of women working was not a factor is seen in the following graph, where the ratio of married men to married women working has been plotted.


The ratio is changing very slowly from the mid 1980s (about 1.4) to the late 1990s (about 1.3).  In the preceding 15 years then ratio had come down from much more rapidly from a level around 2.2.  The earlier 15 years had seen virtually no increase in median real household income.

There is one factor that we have not measured here.  The rise in the relative number of women working was not changing radically after the mid 1980s but perhaps their pay was rising faster than men.  That is data that will need to be examined.

Another factor that should be looked at is the increase in the number of unmarried couples forming households in the past twenty years or so.  That would also increase household income for what were formerly two households have become one and do not show up in the data for married men and women.

Employment Population Ratio

This is something that we would expect to be affected by the baby boom bubble being completely in the work force, just because the working age cohort is a larger portion of the population in these years. That is exactly what is seen as the baby boomers are all in the over-twenty population by 1984.


Trend lines added by author.

It is clear that the baby boomers probably helped boost the population participation rate, but that does not explain why the golden years went on as long as they did.  Presumably most of the baby boomers were in the work force by the mid 1980s.

And the baby boom cannot explain why real household income has dropped so much in the years since 2000.  The first baby boomers only reached age 65 this year.

Conclusion

We still have a mystery not explained about why the “golden years” for real household income occurred when and how they did.  Until more data is examined we will have to listen to Republicans talk about the genius of Reagan and the Democrats about the acumen of Clinton.


5 replies on “Real Household Income”

  1. [mEDITate-OR: think what you think you are supposed to think…
    when The Facts don’t support that.
    ——-
    The analysis from John Lounsbury provides U.S. with a very interesting view of:
    when we were much better off, and now, when we are not.
    Howsomever, what John admits is that he cannot see The Why of It.
    Eliminate the Baby Boomers, eliminate RonnieR and Little Willie Clinton, eliminate woemen (theoretically, of course) and what are “we left” with…?
    Tis too Far Right to blame it all on W…!!!
    And that’s true even if/since he really does deserve it.
    ——
    However, there are some parsings that need to be considered:
    FIRST, when woemen left home to work did not occur at the same time as the rise in single parent homes. So, adding a 2nd income would substantially increase “household” incomes, and divorces would substantially decrease them. But, when? And, by how much?
    SECOND, the decline in high(er) paying “labor union” jobs may have been offset by the dot.com bubble; but NAFTA exported them. We need to factor in precisely when that happened.
    THIRD, just after 9-11 the “war economy” – using Gulf Oil states loans to U.S. – did not appear to create many high income jobs; but the 02-06 housing bubble – using Chinese loans to U.S. – obviously did. When that bubble burst the economy tanked.
    ———
    Said/asked Humpty:
    “This is really Dumpty. Can no body put U.S. back together again?”
    (or something like that)

  2. JGB – – –

    I got to the point you see with the data and decided not to make this a “finished” article but to show how far I had gotten and to make it into a working paper that I can try to keep coming back to as I find more “threads to pull” from the sweater.

    The situation is sort of like I have with the capital and labor paper I put up a week or so ago. A lot of data and a lot more work needed.

    John

  3. John
    Looking forward to your follow-up.
    I’d expect you to find the reasoning for the decline 2001 to date;
    -off-shoring production ramps up late 90’s;
    * Loss of positive multiplier effect from increased imports – 1st spend % stayed in domestic hands (real profit on-shore) much higher in 80’s/90’s.
    *Due to heavy domestic regulatory costs of production. About the same time WMT, Dell, TGT and others began importing in earnest- to avoid those costs.
    *Transitioning many production jobs to the lower pay service sector.

    -Financialization of the economy starting in the late 90’s – allocation of capital to financial engineering (products) vs employment building industrial production.
    The repeal of Glass-Steagall and the ramp up up fannie & freddie to put anyone that can breath air in a house policy — laid the groundwork for this shift…also unreg’s derivatives. Finance sector employment replaced manufacturing labor in large measure – until the ponzi bubble hit in 07-08.

    -Misallocation of resources and capital into RE – so that pumped and then dumped in 07. % of immigrant workforce legal or otherwise and associated lower pay rates.

    *Somehow as the Fed became the savior of economic cycles (vs Volker’s velvet thundering hand), household incomes have been dropping. Maybe there’s a correlation of debt-money supply-interest rates, etc.

    As always – look forward to your work

    DigDeep

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