Personal Finance: Middle class income growth masks underlying issues

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Last week, the U.S. Census Bureau released its annual report on income and poverty in America. The news was good: real median household income for 2017 rose by 1.8 percent over the previous year, exceeding $61,000 for the first time. In metropolitan Chattanooga, the Census Bureau said Tuesday the median household income last year rose to $50,250. The median level is the number about which half of all households fall above and half below. In addition, for a third straight year the poverty rate in the U.S. declined as the unemployment rate continued to fall.

But this decidedly positive report masks deeper structural weaknesses in wage growth and widening income disparity that threaten to weaken the social fabric. Any substantive consideration of solutions must begin with an objective assessment of the landscape. Let’s take a closer look.

The Census Bureau revised its survey methodology in 2013 to improve accuracy. However, the changes were not applied to data from prior years. Adjusting for the measurement change, median income for 2017 is not materially different from 1999. In other words, the middle household, earned the same income after inflation last year as they did 18 years ago.

And it turns out that most of last year’s income gain was the result of working more hours, not higher wages. About 2.4 million workers moved from part-time to full-time employment during the year. And for all workers, average hours worked per week edged higher, contributing to the increased income.

In fact, hourly wages adjusted for inflation have barely budged in four decades. According to a Pew Research report, the average hourly earnings of American workers after inflation is nearly identical with the level of wages in 1978. But the stagnant average wage obscures a more difficult problem, namely the growing disparity of wage income between upper and lower income workers. The same Pew report found that since 2000, usual weekly income for the highest 10 percent of earners grew 5 times faster than for the lowest 10 percent.

The Census Bureau report hints at the wage stagnation and disparity dilemma. While median real income increased in the aggregate, a segmentation of the data reveals challenges. For households that worked full-time during 2017, median real earnings actually declined by 1.1 percent. More people worked full-time for less pay.

The reported income gains were unequally distributed among income levels as well. While the bottom half of workers gained 1.8 percent on average, the top 10 percent added 2.8 percent and the top 5 percent got a 3 percent raise in 2017, widening the already alarming gap between those benefiting from the expansion and those falling behind.

Serious deliberation over the dual challenges of wage stagnation and income inequality appears unlikely at present. In fact, current policy seems designed to exacerbate the disparity problem. Consider for example the December 2017 Tax Reform Act. Originally (and importantly) envisioned as a reform of our hopelessly antiquated corporate tax structure, the final bill morphed into an exercise in reverse redistribution of income. The Tax Policy Center estimates the middle 20 percent of earners will enjoy a gain of 1.6 percent in income after the tax cuts, while the top 5 percent will receive a 4.1 percent bonus. The effect will be to intensify the already problematic disparity. Other respected analysts vary slightly in magnitude but all agree on direction and proportion. And, of course, the ballooning deficits from the tax cuts will weaken the safety net upon which the lowest earners depend most.

So while the headline gain in median income is indisputably positive, significant structural issues beneath the surface threaten our long-term prosperity and weaken our polity.

Next week: consideration of policy responses.

Christopher A. Hopkins, CFA

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