Income Picture: August 31, 2005
By Lawrence Mishel
August 31, 2005

August 31, 2005

Economy up, people down
Declining earnings undercut income growth

Although the economy expanded solidly in 2004, the inflation-adjusted income of the median household was unchanged and remains $1,700, or 3.8%, below its most recent peak in 1999, according to yesterday's release by the U.S. Bureau of the Census. 
 
The main factor explaining this significant, ongoing decline in household income appears to be the faltering job market, especially regarding real annual earnings, which fell significantly for both men (-2.3%) and women (-1.0%).  The decline for men was the largest one-year drop since 1990; for women, it was the biggest fall since 1995. 
 
EPI's analysis of the Census data shows that increased hours of work actually raised mid-level household annual incomes by 0.5% in 2004, but that real hourly wage decline subtracted that much and more (-1.3%) from income growth.
 
The 2004 level of median household income—$44,389—was slightly below the 2003 level, but the change was not statistically significant.  However, the 1.2% decline in real household income for non-elderly families from 2003 to 2004 was statistically significant, again implicating a weak job market in these results.  Since 2000, the median household income of non-elderly households is down $2,572 (or 4.8%) compared to $1,669 (or 3.6%) for all households.
 
The real income of the typical household has fallen five years in a row, despite the fact that the last three of those years—2002, 2003, and 2004—have been years of economic expansion.  Over these years, our workforce has become a great deal more productive, as output per hour is up 15% from 2000 to 2004.  Yet, as shown in Figure 1, these productivity gains have failed to reach the typical household.  

 
The number and share of persons in poverty also increased last year, from 12.5% to 12.7%, the fourth consecutive increase since poverty hit 11.3% in 2000 (the end of the last expansion).  Since that year, 5.4 million more persons, including 1.4 million children, have been added to the poverty rolls.
 
The key factor behind the deterioration of real household income and increase in poverty is the prolonged labor market slump that began in 2001.  Although the job market expanded consistently in 2004—the Census report shows the addition of 1.5 million workers in 2004 over 2003—this addition was not faster than the growth of total households and not enough to absorb the labor market slack left over from the longest jobless recovery on record. These conditions are constraining the bargaining power of many in the workforce, such that the benefits of overall growth are failing to reach working families.
 
The unbalanced nature of the economic recovery is also documented in the latest Census release.  While the share of total national income flowing to the bottom 60% of households was essentially unchanged, the share going to the top 5% was up 0.4 percentage points, from 21.4% to 21.8%.  As of 2004, the top fifth of households held 50.1% of all income, tied with 2001 for the highest share on record.  Similarly, as shown in Figure 2, while the average real income of middle-income households fell slightly (down $300 or 0.7%—from $44,759 to $44,455), that of households in the top 5% grew by over $4,000 (+1.7%), from $260,045 to $264,387.

These inequality results for households corroborate the findings from other data sources, such as Commerce Department data on profits and compensation.  These more aggregate statistics have also been suggestive of increasing inequality, as a larger-than-usual share of national income took the form of non-labor income (e.g., investment income and profits) that tend to accrue to those at the upper end of the wealth scale.
 
As for health insurance coverage, the overall number of Americans without health insurance increased for the fourth year in a row, up six million since 2000, to 45.8 million in 2004, an increase in the share of uninsured Americans from 14.2% to 15.7%. 
 
In another example of the diminished bargaining power of working Americans, the greatest declines in health insurance coverage occurred in employment-based insurance, which has dropped every year since 2000.  In 2000, 63.6% of the population had employment-based coverage.  By 2004, this rate had dropped to 59.8%.  Though some workers picked up health coverage through public sources or from another family member's coverage, nearly 800,000 more workers were uninsured in 2004 compared to 2003.  A full 19.0% of all workers were uninsured in 2004.
 
Some commentators have argued that these disappointing income and poverty results simply reflect lags in the economy, suggesting that it can take numerous years for the living standards of working families to catch up with overall growth.  And it is the case that the last recovery looked much like this one in terms of how long it took for households to reconnect to the expanding economy.
 
This view is far too dismissive of the historically large gap between income and productivity growth, both now and in the last recovery.  Based on these last two expansions, it appears that the changes in the economy—globalization, fewer unions, lower minimum wages, shifting norms in taxation and regulation favoring investors over wage-earners, and recoveries without adequate job growth—have significantly increased the time it takes for working families to reap the benefits of growth.  
 
If the recovery persists, the wages and salaries of most working families likely will begin to rise in real terms at some point.  But there is no compelling rationale for these families to passively accept these longer "lags" as an acceptable state of affairs.  To the contrary, policy makers need to create and implement a policy framework that counteracts this trend and ensures that all of the bakers get their fair share of the expanding pie.
 
Until then, Congress and the administration need to maintain and strengthen the programs and services that push back against these negative income and inequality trends.  For example, Congress will soon vote on deep cuts in Medicaid (public health insurance for low-income persons) and Food Stamps as part of the budget reconciliation process.  Given the rise in poverty and the decline in employer-provided coverage, these aspects of our safety net are particularly important right now and should not be cut back.

By Lawrence Mishel and Jared Bernstein, and Elise Gould
Research assistance provided by Yulia Fungard and programming assistance provided by Danielle Gao.

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