“We’re rich! We’re rich!” I proclaimed to the household Wednesday morning while reading headlines noting that median household incomes in Minnesota rose 17 percent in the 1990s, and that the St. Paul-Minneapolis metro area now ranks fourth in the nation in income.
My wife didn’t buy it. She got laid off two weeks ago, and my income as a self-employed pundit has been variable.
This is a good economic lesson: Median incomes may rise, but individual incomes can fall.
Context is key. Going from 14th to fourth nationally may be a source of pride, but overall income increases were not much above what Minnesota has experienced in some prior decades. Also, understand what is meant by “median” and by “household.”
Let’s start with the basics. For income to rise, the value of output has to rise. People and households can buy more goods only if more goods are there. More output can come from using more resources, like labor, raw materials or capital, or from greater efficiency in producing outputs.
Productivity and output rose in the ’90s, especially in the last half of the decade, so incomes logically should have risen. The 14 percent and 17 percent rise in median income for Minnesota and the metro area are modest when reduced to annual averages (1.3 and 1.7 percent a year, respectively).
Compare income increases of the 1990s to other periods. The ’90s were good here compared to the previous two decades. Median household income (the mark reported Wednesday) rose only by 0.4 percent each year in the 1980s and 0.8 percent in the 1970s. This was under the U.S. average of 0.7 percent for the 1980s, perhaps because Minnesota farms were hard hit. However, in the 1970s, we beat the national pace of 0.55 percent.
So the 1990s win easily as the best decade for income increases out of the last three. But family income, only slightly different from that of households, grew by nearly 43 percent for Minnesotans from 1960 to 1970, averaging 3.6 percent growth a year, more than twice that of the 1990s.
Other U.S. data show annual increases of 2.4 percent over the 1940s, 1.6 percent through the 1950s and 3.1 percent in the 1960s. So although the ’90s had the best income growth in the 30 years we boomers have been in the work force, the decade had a growth rate similar to that of our parents when we were growing up.
Figures this week referred to median household income, meaning half of all households earn more than and half earn less. It differs from mean or average household income, which is higher. It differs from per capita average income, which is lower.
The degree to which mean, or average income, exceeds median income gives an idea of how evenly incomes are distributed.
In 1960, the mean family income was about 11 percent above the median, indicating a modest skew toward higher-income households. By 1970, that figure was 12.5 percent and by 1980, 14 percent.
A big jump came in the 1980s, during which it rose to 21 percent. In 2000, the mean exceeded the median by nearly 29 percent, so well-off family incomes continued to grow faster than that of lower- income families.
But lower-income families and households did see real increases in the ’90s. The proportion in the lowest income brackets fell, as did the percentage of families in poverty. Some people rue that the rich are getting richer faster than the poor are, but few households got poorer.
Another detail to keep in mind is that median household income is different from median family income.
To quote the Census Bureau: “A household consists of all the persons who occupy a house, an apartment, or a room, which constitutes a housing unit…. A family is a group of two persons or more (one…is house holder) residing together and related by birth, marriage, or adoption.”
Every family is a household, but not every household is a family. With higher rates of divorce and children moving out of the house to live independently at a younger age, at least from the ’60s through the ’80s, the number of households grew faster than the population. Thus, household mean and median income grew more slowly than average income per family or per person.
Combining the fact that income grew faster for high-income people in the 1980s and early 1990s with the fact that the number of households increased faster than the population leads to some interesting comparisons. Household median income grew by 1.3 percent per year in Minnesota in the 1990s while per capita average income grew by 1.8 percent.
The different is substantial. At 1.3 percent per year, incomes take nearly 54 years to double. At 1.8 percent, they double in less than 39. We are better off than a decade ago. Exactly how much better off depends on a number of issues.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.