About the authors

Dr. Stephen Rose is an economic consultant and author in Seattle. Dr. David Fasenfest is a Senior Researcher and the Director of Urban and Development Economics at the Urban‘ Studies Center of the University of Louisville. Partial support for this project was provided by the Kentucky Population Research Project.

Introduction

There has been considerable controversy over the character of recent income developments. Some analysts have claimed that there have been a “shrinking middle class,” stagnant income growth, and a widening gap between the rich and the poor. These claims have been challenged by other analysts for various “technical” reasons. The public has watched in dismay as experts arrive at different conclusions even though they use the same government collected data.

This report examines family income developments between 1979 (the last business cycle peak) and 1986 (the latest year for which comprehensive data are available). We have adopted the most conservative procedures possible so that our study is not subject to the criticisms made of other studies which have also found widening inequality and slow growth.

The major criticism of other studies is that they used the official Consumer Price Index. (CPI) as their inflation measure, a measure which some analysts say is “flawed.” The CPI is said to have overstated inflation because of its treatment of housing prices prior to being revised in 1983. As a result, inflation-adjustments using the CPI are said to understate wage and income growth relative to inflation. In response, we use an inflation measure (technically, the CPI-U-X1) which does not have this alleged problem.

Another criticism of recent studies of family incomes is that they failed to “adjust” for changes in family size. Since families are new smaller, these critics contend. even if family incomes are new the same as they were eight years ago, the average family member is still better off. That is, each member of a three person family with a $30,000 income is economically better off than members of a four person family with the same $30,000 income. In response, we make a “family size” adjustment.

Another criticism of prior family income studies is that they exclude economic developments among those not in families, a group that has fared better than average. In response, the population studied in this report. includes both “unrelated individuals” and families. Finally, we also make a correction for the fact that individuals underreport various types of incomes (primarily transfer and property income). This underreporting leads to an overstatement of income inequality.

Although these procedures are prudent and reasonable (see Appendix A for a detailed discussion of our methodological procedures), they skew the data to overstate recent increases in economic well-being. For instance, if a family with one child and an income of $20,000 a year refrains from having another child because of the added expense, our adjustments make them appear better off as a result of this decision—the same income with a larger family would show a lower effective standard of living. Another problem is the uncounted services lost when both husband and wife are in the paid labor force. The increased expenses of daycare and of meals bought away from the home, plus the loss of other home care services. do not count in measuring well-being in a simple monetary income measure.