Talking About Income: Inflation & Median Income

By Luke Pretz

Numbers about income are thrown around recklessly in general conversation about the economy, often to justify the status quo and make people feel ‘lucky’ about their table crumbs. Talking About Income is a series where we peer behind the numbers and explore how income, its distribution, and makeup have evolved and shape our economy today.

Wallets

Forty years ago, according to US Census Bureau data, the median household income was $11,800. Two years ago the median household income was $51,939. At first glance these are some very encouraging numbers giving the impression that incomes are growing a lot.  Those numbers seem to suggest that maybe the capitalism of the last 30 years — a variety that has cut social insurance, crushed unions, minimized taxes for the rich —  was a really beneficial. In the context of an economy that has grown from $5.4 trillion to $16.3 trillion maybe it was  actually the case that growth did trickle down to the working class as proponents of free market capitalism suggest. However, when we apply some simple economic tools to these numbers we uncover the not so surprising truth: the average worker and their family hasn’t  improved their position all that much. The pie has grown, but our share, even in absolute terms, has stayed the same.

Here, we are going explore some of the fundamental tools for understanding the numbers surrounding income. The first topic that we will work through is inflation, what it means, how we adjust for it, and why it is important. The second topic is what is a median. The final topic is why using a median instead of an average matters.

What is household income?

Income, according to the US Census Bureau, is the total amount of money accumulated over the course of a year from a variety of sources which include the money earned from a paycheck, the interest off of a bank account, and the amount of money that you made from money made from trading in the stock market. In addition to the things that are traditionally talked about as income there are a number of other things that count towards your income: unemployment benefits, workers compensation, union pensions, the money in a birthday card from grandma, and other transfers from the government, family, job, and anywhere else a person gets money.

Households, as the US Census Bureau defines them, are a group of people who live in a house, apartment, or room together as long as it is intended to be “separate living quarters”. The Census Bureau also has statistics for families as well, but the family measure might not cover a lot of living situations that might not be covered by “traditional” families, unmarried partners, roommates who share expenses, etc. Unfortunately, even with the broader household measure of income it’s not perfect and leaves out some of the most marginalized members of our society, the transient and homeless.

While we see some of the same trends in individual income and household income figures, looking at changes at the household level can show us a lot about how the economy has changed in the last 30 years. For instance, since 1965 the number of families with more than one wage earners has steadily increased from just under one-half to over 60% in 2013, thanks to the struggle for equal rights in the labor market. But with the increase in the number of dual-income families there is not a corresponding expansion in the total income made that corresponds to the size of the growth of the labor force. What this means is that while the number of people in the workforce grew the amount of income going to households  did not.

What is inflation and how do we “adjust for inflation”?

Inflation is something that we hear a lot about in the media from reporters, economists, the Federal Reserve, and politicians. When we talk about inflation, what we mean, is that that the price of most goods, on average, has increased. In our day to day lives this means that if there was an inflation rate of five percent between now and one year from now we would all need a five percent raise in our incomes to buy everything we did last year. That is to say, one dollar now buys more (or is worth more) now than it would be after five percent inflation. Since inflation means that a dollar’s purchasing power changes over time we need to adjust for inflation so that we can compare like items over time.

Economists adjust for inflation when looking at almost anything that is listed in money terms, dollars, pounds, rupees, yen or otherwise. To adjust for inflation they look at what is called a basket of goods, things commonly consumed in the economy like fuel, food, medicine, and housing and compare how the price of those goods changed year to year. So, if there is an average increase in the basket of goods of one percent between 2015 and 2016 then we would say the inflation rate was once percent When we look at non-consecutive years like 1975 and 2013 we have to calculate the total inflation rate between 1975 and 2013 by adding up the yearly inflation rates between those years.

When we adjust the raw figures to account for the inflation that occurred between 1975 and 2013 the change in the median wage in those 28 years is much less impressive. Instead of increasing by nearly 500%median wages only increased by a little more than 10%.

What is a median and why do we use medians?

Another numerical adjustment that we need to know about to accurately talk about changes in income over time and what tool to use to talk about the whole group, means or medians. Both figures tell us about income and the whole group that was surveyed but each figure often gives very different results causing us to draw different conclusions.

Means are what we usually call the average and is calculated by adding up the incomes in the survey and then dividing that number by the number of people who took the survey. Means, however have one big flaw, they are biased towards outliers or small amounts of responses to the survey that are far away from the norm. In a society like ours, which has huge gaps in incomes, between the 99% and the top 1%,  and huge levels of inequality the mean will make it look like members of the 99% are much better off than they actually are.

To make sure our results most accurately reflect the situation of most of the population we need to use medians. To calculate a median we line up all of the reported incomes from the survey in numerical order and then pick the income that falls exactly in the middle of the list. What this does is insulate our impressions from the distorting effects of the top one percent on the mean.

When we look at the above graph comparing mean and median incomes between 1975 and 2013 we see that there is a widening gap between the two lines. What that suggests is that there is growing inequality. As the economy has grown over the past thirty years wages have grown but the share of that growth is increasingly concentrated in the hands of the top 1 percent. We see this trend because the median income is not increasing as fast as the average.

Conclusion

In the first instalment of Talking About Income we covered some of the basics about the data and the basic statistics and tools of analysis for talking about income and income data. First, we found that accounting for inflation changed our perception of how and how much incomes have changed since 1975. We also found that using different statistical tools also gave us different impressions of how household incomes have changed and when we compare means and medians we can see that there is an increase in income inequality.

In the next instalment we will go back and look more closely at how households have changed and what this says about the status of household incomes since 1975.