23 Sep 2014

The American Middle Class Hasn’t Gotten A Raise In 15 Years

In 1988, the typical American adult was 40 years old, white and married, with a high school diploma. If he was a man, he probably worked full time. If she was a woman, she probably didn’t.
Twenty-five years later, Americans are older, more diverse and more educated. We are less likely to be married and more likely to live alone. Work is divided more evenly between the sexes. One thing that hasn’t changed? The income of the median U.S. household is still just under $52,000.
The government’s release last week of income and poverty data for 2013 brought renewed attention to the apparent stagnation of the American middle class — not just since the financial crisis hit six years ago this month, but for much of the decade that preceded the crash. The report showed that the economic recovery has yet to translate into higher incomes for the typical American family. After adjusting for inflation, U.S. median household income is still 8 percent lower than it was before the recession, 9 percent lower than at its peak in 1999, and essentially unchanged since the end of the Reagan administration.
“As a country,” New York magazine’s Annie Lowrey wrote Friday, “we peaked in the late 1990s.”
There’s little doubt that the past 15 years have been hard ones for the middle class. But median income isn’t necessarily the best way to show that. The problem is that changes in median income reflect several trends all jumbled together: the aging of the population, changing patterns in work and schooling, and the evolving makeup of the American family, as well as long- and short-term trends in the economy itself. Understanding the state of the American middle class requires digging a bit deeper than median income alone.
Let’s start with what median income does measure: the amount of money earned by the household at the midpoint of the U.S. income distribution — half of households make more, and half make less. Journalists, including me, often refer to it as the amount earned1 by the “typical household,” which is true as long as we’re talking about a moment in time. But as soon as we start talking about change over time, median income becomes trickier to interpret.
 To understand why, imagine a simple model in which there are five people. The poorest makes $30,000 a year and the richest $70,000, with the other three evenly distributed in between. The group’s median income would be $50,000. The next year, everyone gets a $10,000 raise — except the richest person, who retires and starts drawing a $40,000-a-year pension. Most people see their income go up, but the median remains unchanged.2
This scenario is oversimplified, but it illustrates a trend. On average, people’s earnings rise in their 20s and 30s, peak sometime in their late 40s or early 50s, and then decline when they retire.3 All else equal, theretirement of the baby boom generation should push down the overall median income.


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