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Snapshot for November 8, 2006.

A tough recovery by any measure

by  Jared Bernstein and Jason Furman

Data on wages, compensation, and income paint a disappointing picture of the current economic expansion, especially from the perspective of low- and middle-income families. For middle-income households, real incomes were lower in 2005 than in the recession year of 2001, and real wages, after rising through mid-2003, fell consistently until most recently.

These unfortunate trends have occurred amid strong productivity growth, which implies that wage and income inequality—and in particular, the gaps between what high-income Americans and other Americans are getting—has grown. Recently released Census data show that the top fifth of households received 50.4% of the nation’s income in 2005, equal to the highest share on record.

But what about consumer expenditures? Have either the tax cuts or the increased borrowing over this period offset these unequal income losses enough to equalize the changes in consumption expenditures by income class?

The chart below shows that this has not been the case. From 2001 to 2004, the share of consumer expenditures made by the 20% of households with the highest pre-tax incomes rose by 1.2 percentage points. This is the largest three-year rise on record since these data began to be collected in 1984. The share for middle-income households is down slightly for this same period and the share for the lowest-income households is down just about a percentage point. 

These developments contrast with what occurred during the comparable phase of the previous economic recovery from 1991 to 1994. In that period, the consumption shares of the various income groups remained relatively stable.

These findings suggest that neither borrowing nor tax cuts have offset the increase in inequality over this period. By any measure, the recovery is one in which prosperity has been anything but broadly shared.

Data are from published tabulations on consumer expenditures from the Bureau Labor Statistics.

This Snapshot is an excerpt from the forthcoming paper, A Tough Recovery By Any Measure, by the same authors.

Jared Bernstein is a senior economist at the Economic Policy Institute and Jason Furman is a non-resident senior fellow at the Center on Budget and Policy Priorities.